Private Money Loans: Document the Relationship as Carefully as the Property

Build the financing analysis

Decide whether the arrangement is debt or ownership

Start with the economic promise. A lender expects scheduled payments and a repayment obligation; an equity investor participates in ownership economics and governance. A promise of fixed interest combined with profit participation needs explicit drafting and tax review. Calling everyone a partner obscures who bears which losses.

Write down the borrower, lender, advance amount, use of proceeds and authority to sign. If several people supply funds, determine who holds the mortgage, how advances and repayments are allocated and who can approve a modification. Do not collect investment money under a casual note template and assume securities rules cannot apply. Obtain advice before soliciting investors or advertising returns.

Underwrite the collateral from both sides

Order title work and identify existing mortgages, tax obligations, judgments and other relevant interests before discussing security as if it were already established. A recorded mortgage has a priority position that affects recovery. Its presence does not mean foreclosure will produce enough cash to repay every creditor.

For a junior loan, show the senior balance, senior payment, permitted subordinate debt and a conservative property value. Include selling or enforcement costs in the lender’s loss scenario. The borrower should also evaluate whether the senior documents permit the proposed transaction. A private lender’s willingness to accept a second position does not cure a restriction in another agreement.

Make the repayment schedule unambiguous

Define when interest begins, the day-count convention, due dates, application of payments and final maturity. Distinguish interest-only payments from amortizing payments and describe any balloon. Specify treatment of partial months, late payments, extra principal, returned payments and payoff requests. Have the actual schedule reconciled with the note.

Ask how the lender’s own liquidity needs fit the term. Money needed for a near-term personal obligation may be a poor match for a construction project with an uncertain exit. The borrower cannot treat an extension as automatic; the lender cannot assume collateral makes the loan instantly liquid. A realistic maturity protects the relationship better than an optimistic verbal promise.

Use a controlled closing and servicing process

Have the closing professional coordinate documents, title insurance where appropriate, mortgage recording and disbursement conditions. Verify wire instructions through a trusted independent channel. Keep evidence that the agreed funds were delivered and that the intended security was created rather than relying on an unsigned draft or email attachment.

Select a servicer or define who keeps the ledger. Both parties need statements that separate interest, principal, escrow and fees. Set a process for insurance renewals, tax monitoring, payment changes and annual tax reporting. Confirm how a loan assignment or a lender’s incapacity would be handled. These administrative details matter most when the original contact is no longer available.

Write the adverse scenario before borrowing

Describe what happens if the project needs more capital, a payment is missed or the property must be sold below plan. Identify notice and cure provisions, extension authority and any guarantees. Counsel should explain enforcement options and limits. Avoid using an informal promise of taking the property back as a substitute for a lawful default process.

Prepare a recovery waterfall showing sale proceeds, transaction costs, senior payoff and the amount remaining for the private loan. A modest decline can have a large effect on a junior lender. The borrower should retain realistic construction and operating reserves; the lender should decide whether the expected compensation justifies the actual security and illiquidity.

Review Massachusetts and capital-raising requirements

Licensing, interest and charge limits, consumer-credit coverage and securities issues depend on the transaction. Massachusetts provides official license-verification and usury-notice information, but a directory search does not determine every exemption or legal obligation. Ask qualified counsel to assess the intended activity and the complete charge structure.

If you are raising money, provide factual project information and avoid guaranteed-return language. If you are supplying money, independently verify the borrower, property, documents and use of proceeds. Request updates tied to measurable milestones. The practical goal is a financeable project and an enforceable, understandable agreement rather than a compelling presentation supported only by personal trust.

Worked financing example: A junior private loan under a lower-value sale

Calculators for this financing decision

Keep the same assumptions across tools. Check each tool’s definitions and reconcile omitted costs in your own worksheet. A calculation does not establish approval or program eligibility.

Prepare the financing file

Financing questions

Primary sources and program references

Official sources support the legal and program framework. The cash-flow examples, comparison workflows and operating judgments are Boston REIA educational analysis. Verify current requirements and obtain transaction-specific advice.

• Massachusetts Division of Banks: verify a financial services licensee
• Massachusetts Attorney General: usury notice information
• CFPB Regulation Z §1026.3: purpose and coverage
• SEC Investor.gov: promissory notes

Compare the relevant financing alternatives

Take a documented question to Boston REIA