You need to hire a real estate attorney in your area. This is a complex transaction, which needs some personal attention. You may also want to have a real estate broker arrange the financing depending on the interest rate you intend to charge.
This answer does not constitue legal advice, nor does it creat an attorney/client relationship. If you are seeking legal advice upon which you intend to rely, you should hire competent cousel familiar with this area of the law in your locale.
Your scenario requires the attention of a local real estate attorney to be sure that everything is properly drafted, processed and perfected.
** LEGAL DISCLAIMER ** My response above is not legal advice and it does not establish an attoreny-client relationship. When responding to questions posted on Avvo, I provide a general purpose response based on California law as I am licensed in California. In reviewing my response, you are specifically advised that your use of, or reliance upon any response I provide is not advisable. I do not have all relevant background details or facts related to your issue / matter, thus I am not in a position to give you legal advice. Further, your review, use of, or reliance upon my response does not establish an attorney-client relationship between us nor does it qualify as a legal consultation for any purpose. For specific advice regarding your particular circumstances, you should consult and retain local counsel. Law Offices of Eric J. Gold www.EGoldLaw.com Telephone: 818-279-2737 Email: email@example.com
You're pursuing a path riddled with regulatory risks, so be careful. There is truly no means by which a private person that is not a finance professional can offer a promissory note in the manner that you propose without having some licensing requirements and regulatory oversight imposed on your lending activities, even if you engage the services of a third-party broker. You need a license.
Assuming you're a licensed professional, my suggestion would be to structure this as a construction loan, whereby the borrower will use the proceeds for a use primarily for other than personal, family, or household purposes so as to avoid the scrutiny and growing complexity of residential mortgage lending in California. By doing so, your proposed interest rate cannot be deemed unlawful, you'll avoid the penalties and risks associated with consumer and residential mortgage lending, and the enforcement of your promissory note will likely be strictly enforced by the courts. In other words, this is routine financing for real estate developers and commercial lenders. The trouble with this approach is that (i) you'd need a finance lender's license in California and be required to observe the requirements applicable to California Finance Lenders; and (ii) you may be aware that this is a personal loan (borrower’s assertion based on your dealings) that otherwise disqualifies this loan from it being a commercial loan to which you’d then be subject to the regulatory regime of mortgage lending.
To make residential mortgage loans (loans for personal use securitized by a deed of trust), you'll personally need to be licensed as (i) bank; (ii) real estate broker, (iii) finance lender, or (iv) residential mortgage lender, and utilizing a real estate broker would not exempt you from this requirement. You’d also need to comply with the state and federal requirements imposed upon mortgage lending.
While there are people that will suggest that you’re not doing business as a lender that may suggest that you’re not subject to these laws, this lawyer’s opinion is based an observance of these types of transactions encountering a dispute, and how to avoid the worst-case scenario. While it is true that you may trust your partners not to entertain a dispute, I would retort with the rhetorical question as to then why the need for the promissory note and deed of trust?
If you don’t have any of these licenses, you could structure this as a partnership whereby the entity would purchase and retain title to the home, you’d establish minimum capital contributions for both of the partners, and establish promissory notes for the unpaid portions of each partner’s unpaid capital contributions (between the partner and the partnership). Once the rehab is done, the partnership offers the home for sale whereby the partner or a 3d party can purchase/re-finance the home, the capital contributions are repaid to the partners, the promissory notes are forgiven, and you can structure a capital gains tax rate for your net proceeds if the interest is held for more than one year. There are other details of this transaction that you would want to ensure the smooth operation of the partnership and the fulfillment of the business objective that I’ll withhold from here (trade secrets that you can pay for),but you get the idea that this is feasible.
Tread lightly in this domain, but this is a lucrative business that many entertain. If you must persist, I suggest the use of creativity to avoid risk, rather than a woeful adjustment to your risk tolerance without full awareness of the details.
For legal advice and representation, consult an attorney. This response was provided for informational and marketing purposes only, and should not be relied upon as legal advice. No communication with the author of this comment through this website can establish an attorney-client relationship, as the attorney-client relationship can only be established by the mutual understanding of its creation by both the client and the attorney, each party intending to create such a relationship.