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I would only do this if I was a lienholder on the property and had 99% confidence in the merit of the deal. I would need to have a complete understanding of the deal including all other funding sources, the immediate income the new owners will get, the repayment schedule that is agreed to and solid evidence that there was sufficient income flow to repay me. I once loaned my son that amount of money ($150K actually) and required that information. He just made his final payment to me and the debt is cancelled. Surely, you would do no less for someone you have only known 5 years. 6% is not a high interest rate for "hard money". A bank would charge a great deal more.
When I loaned my son the money he was able to show me that he had been approved to obtain a bank loan, but the rate would have been higher than what I gave him. Again, you should expect no less of this person. If a bank doesn't deem this deal credit worthy, you also shouldn't. Your 6% is a great bargain for him. And the length of time for repayment, you may be able to buy a brokered CD for a little less interest but no risk.
If you aren't prepared to write off $50k as a loss and never see it again, you shouldn't do this. If $50k is not significant to you, and worth the risk, do your due diligence, as everyone else has said, and hire an attorney and do it right. No handshake and "my word is my bond" deals for that sort of money.
Personally, I wouldn't do it, even if I had $50k just kicking around. Especially not for someone I've only known casually for a few years. If I WAS going to do this, no way would I do it for only 6% returns.
I don't lend people money, I just give it to them with no expectations of being paid back..
I wouldn't lend that big of a sum of money to anyone without a contract.. unless that person did something for me in the past and I owe them big.. then I'd write the check without any contract, due diligence, or expectations of being repaid.
Thanks all for the opinion. Apparently, we didn't have to cross the bridge - as of yet - because he wanted the money only in the situation where the bank valuation came in much lower than the agreed price, which he doesn't expect to happen. So, if that situation were to materialize then I expect to do my due diligence before I make a decision.
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