Why Hard Money Lenders Will Lend to Companies and Not People

First the disclaimer – this is not legal advice, I am not an attorney, this story was told to me by the private lender involved. It is not verified, I can’t even reference the case, so consult your own attorney about your own deals!!!

The scenario: Private lender was approached to lend money to a company. The company owned a parcel of land in New Hampshire free and clear, and wished to borrow against it. The private lender agreed, and had the manager of the company sign an affidavit stating that this was a commercial purpose loan. The company intended to build on the parcel to for a new business location. The lender did not walk the entire 100 acre parcel, since it was winter and snowy.

The company wished to borrow the money for 3 years, however, the private lender agreed to a one year term only. The borrower agreed, the papers were drawn up, and the closing attorney (not a paralegal at a title company, but a real estate attorney) explained all the terms and conditions to the manager of the company at the closing table.  The loan closed.

One year later, the company couldn’t make payments, the loan went into default, and months later after working with the borrower,  the private lender initiated foreclosure.  The company sued the private lender to stop the foreclosure.

In court, the manager of the company accused the private lender of changing the loan, saying it was a three year term, even though he signed a promissory note for one year. In addition, the company representative said this was a residential loan, that the private lender was not licensed to do residential loans, and that the private lender should have known that the manager intended to build a house for his 85 year old grandmother on the property. The reason the private lender should have known this (according to the borrower) was that there was an old cabin far back on the property in the woods. Are you kidding me? The private lender had not walked the entire acreage because there was snow cover, and so never saw the cabin.

Now when a private lender ends up in court, the judge is seldom sympathic to the lender.  Usually the other party is someone who feels wronged by the lender, and the judge is more sympathic to that party.  In this case, it was different.    The other party was a company, the company representative signed an affidavit stating that the loan was for commercial purposes.   The judge found for the private lender, and the foreclosure went forward.

Now, no one wants to go to foreclosure, not the company, and not the private lender.  But that is the unfortunate circumstance when a borrower defaults.   That is the private lender’s only remedy.

Why am I telling you this story?  Am I expecting sympathy for the lender?  Not likely.  It is to illustrate why private lenders are not doing residential loans anymore since the advent of the SAFE act.  The SAFE act mandates licensing for residential mortgage lenders.  The licensing requirements are expensive and extreme for most private lenders, so they have stopped residential lending.  Sometimes borrowers try to get private lenders to bend the rules.   The above is a good example of why they won’t.

So when you make an offer for a rehab property in disrepair that you intend to fix up and resell, this is a commercial transaction.  Now you know why we want you to take title in a company, and sign paperwork that you won’t ever live in the property.  We don’t want misunderstandings like the above.