A private money, or hard money loan transaction is a complicated and sophisticated process that will require you to consult with competent attorneys along the way.
Because the area is so specialized, it is not as easy as you think to find legal counsel that have specific knowledge of your hard money / private money loan transaction.
Following are different types of attorneys involved in the private money lending area and some tips about how to find the right counsel for you. In some cases, your private money lender (PML) may refer you to counsel who are familiar with private lending laws applicable to investors.
Business - Business or "corporate" counsel will help you with everything from preparing resolutions, forming entities, reviewing loan documents and contracts, and keeping corporate records. This counsel should be independent of your PML’s attorney so you receive objective advice.
Loan Documents - There are attorneys who specialize in loan compliance and preparing loan documents specific to your investment. Your PML works closely with their counsel to draft the documents they typically use. Commercial loan documents are rarely standardized as is the case with residential documents. The larger the transaction, the more complex and the more expensive it will be to prepare the documents. You should have your own business or real estate counsel review the loan documents presented to you by the PML.
Bankruptcy - If the borrower on your loan files bankruptcy, you will need bankruptcy counsel to file motions, and respond to requests made by the bankruptcy petitioner.
Title Insurance - Having a title policy without endorsements is like driving a car without air in the tires; you won’t get very far if you have to submit a claim. A good title attorney will help you craft or select title endorsements which coincide with the type of collateral in which you are investing. At the very least, if you are loaning against a specific property, you should request that the PML provide you with a lender’s title insurance policy at closing on the loan, naming you as a beneficiary in the event of a title insurance claim.
Collection - The PML will generally hire a loan servicer to collect monthly payments, but if there is a foreclosure, and a portion of the loan becomes unsecured, or you need to pursue a guarantee, an attorney specializing in collections will be essential. The loan service is a good source of referrals to those types of attorneys.
Purchase and Sale Agreements - If you are purchasing a note, or a property as part of the loan transaction, find counsel with specific experience in drafting loan or commercial purchase and sale agreements, and ask them to review the transaction.
Selecting the right attorney for the right job will save you time and aggravation. The specialists in these areas will likely charge more than a general attorney, but because of their highly specialized knowledge, they will save you money in the long run because less research will be involved to tackle problems that may arise. The best way to find specific attorneys is by “word of mouth” and referrals from other attorneys, PML’s or investors who have used such attorneys in the past. Frequent panelists at respected/established seminars and conferences can also be a good source. While the internet may also be a good starting point in your search, don’t hire anyone based solely on what you see or read online. Good references from trusted sources are key!