Mom just lent 40k to a friend w/o a contract

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Mom just lent 40k to a friend w/o a contract

Postby AllySK » Fri Jul 12, 2013 12:28 am

Oh man. I was flipping out when I found this out. But I'm calm enough now (I think) to post and ask for advice.

Here is the situation: My mom's friend of 30 years asked to borrow $40,000 to buy a house to fix up and then rent out. The total cost of the house was $340,000. They (friend+friend's husband) couldn't get a loan from the bank because the condition of the house wasn't good enough. So they used a home equity line of credit (on their primary residence, I think) for $300,000 and asked my mom for $40,000. It was "such a good opportunity that they couldn't pass it up." :oops:

The friends have two other rental properties (which also have mortgages on them). They've had them for about 3 years and have been doing well so far (according to my mom). My mom thinks it's a bad idea, that they're going to be stretched too far, but she still agreed! :oops: :oops: :oops: She said she couldn't say no to her friend of 30 years who's never asked for anything before. She felt like if she said no, she'd lose a friend. (I don't agree with this at all, by the way...)

My mom and I are close and we talk about finances all the time. She's pretty savvy. I'm shocked that she did this without consulting me. I finally figured out that she probably didn't consult me because she knew I'd tell her not to do it. She basically admitted to it. :oops:

The bottom line: She already sent the check. She won't take it back. I said that she needs to draw up a contract and have it signed and notarized. She asked me to write one up and she'll ask them to sign it.

More details:
  • They agreed that the friend would pay back the loan in 1 year with 8% interest. (My mom says that's better than she can get in the stock market. I say $3200 isn't worth the worry of losing $40,000. She isn't actually worried though, just me...)
  • She has an email from the friend stating: "I will borrow $30,000 to 40,000 from you and pay you back in one year with a 8% interest. when I received the money, I will send you a receipt (acknowledgement)." (My mom initially wavered between 30k and 40k but ended up lending $40k.) However, I don't think this is enough. I think there needs to be a more formal contract.
  • She trusts the friend completely. She thinks there's 0 possibility of the friend trying to swindle her or intentionally not paying her back. But the risk is if something goes wrong, the housing market tanks, etc. My mom thinks the worst that could happen is that the friend can't pay it back in one year, that it takes longer than a year. She thinks they could pay her back out of their salaries.
  • Friend lives 400 miles away.
  • Mom is in her late 50s. She is doing ok for retirement, has less than most Bogleheads, but she'll have a pension. She said if she doesn't get paid back, losing a friend will hurt more than losing $40k. I don't think she can afford to lose it though. She is also helping my sister out financially.
  • She told her friend that this would be the only time she would give them a loan.
  • I got her to promise to consult with me on any large loans or just anything like this in the future.

Ultimately, even though I think it's a terrible idea, it's her money, and it's already done. At this point, I think the only thing I can do is write up a contract for her and the friends to sign. I started Googling some private loan contract forms. Does anyone have any advice? I feel like private loan contracts might be difficult to enforce. But obviously better than nothing. I mentioned getting a lien on the house but I don't know if that's possible, and it would probably involve more legalese than she's willing to do. Any advice would be appreciated.
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Re: Mom just lent 40k to a friend w/o a contract

Postby billern » Fri Jul 12, 2013 12:32 am

I think loaning $40K to a friend is also a good way to lose a friend. What do you think will happen to the friendship in the event the friend defaults?
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Re: Mom just lent 40k to a friend w/o a contract

Postby AllySK » Fri Jul 12, 2013 12:50 am

billern wrote:I think loaning $40K to a friend is also a good way to lose a friend. What do you think will happen to the friendship in the event the friend defaults?


Oh, I agree completely. I didn't want to rant too much in my OP, but I can't even begin to describe how bad of an idea I think this is. It's not like it's a emergency and the friend is going to lose her home. The friend just wants to make more money! :oops: :oops: :oops:
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Re: Mom just lent 40k to a friend w/o a contract

Postby countdown » Fri Jul 12, 2013 12:52 am

Friend must sign a notarized Note for $40k @ 8percent payable in full in one year, and it should be recorded against the property. This is a very inexpensive procedure and well worth the cost.
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Re: Mom just lent 40k to a friend w/o a contract

Postby AllySK » Fri Jul 12, 2013 1:02 am

countdown wrote:Friend must sign a notarized Note for $40k @ 8percent payable in full in one year, and it should be recorded against the property. This is a very inexpensive procedure and well worth the cost.


Thanks! Can you specify how it is "recorded against the property"? Is this something I can draft?
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Re: Mom just lent 40k to a friend w/o a contract

Postby countdown » Fri Jul 12, 2013 1:11 am

For a $40k issue, I would pay an attorney a few hundred dollars to draft the note/deed and record it. It's not complicated, but must be done correctly and according to the law of your jurisdiction. Let a professional do it. If your mother can afford to lend $40k, she can afford to secure it.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Gnirk » Fri Jul 12, 2013 1:13 am

Yes, you can lose a friend by loaning them money. 15 years ago, my husband (against his own better judgment), joined with a group of friends , and each loaned $10,000 to another friend to help save his business. (All were in the same business, in different cities, and were also all friends for many years). Of course, the friend told everyone "if it's the last thing I do I will pay you all back, with interest".

The friend lost his business, declared bankruptcy, went to work for a large box store as a manager, and we never even received a Christmas card from him.
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Re: Mom just lent 40k to a friend w/o a contract

Postby mac808 » Fri Jul 12, 2013 1:36 am

Depends on the parties involved. I have some close friends who I would trust with my life, and with $40k (2-3% of net worth). Others who I wouldn't. I do believe that in some cases, if it doesn't present much financial risk to the lender, lending cash to a close, responsible friend who is in a tough spot, can work out.

In this case, it sounds like more of a co-investment than a loan for a friend in a tough spot - so just file a note in 1st position on the house and there is little risk.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Call_Me_Op » Fri Jul 12, 2013 8:07 am

My friends know not to ask. And if I were to lose one as a result - that was never a friend to begin with.
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Re: Mom just lent 40k to a friend w/o a contract

Postby dickenjb » Fri Jul 12, 2013 8:08 am

mac808 wrote:In this case, it sounds like more of a co-investment than a loan for a friend in a tough spot - so just file a note in 1st position on the house and there is little risk.


Best advice yet. If the bulk of the money used to buy the rental was indeed a LOC on the investor's primary residence, your mother's note will be the first lien on the investment property. 40K loan as primary lien on $340K property - pretty low risk. Worst case she is paid when the house is sold.
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Re: Mom just lent 40k to a friend w/o a contract

Postby InvestorNewb » Fri Jul 12, 2013 8:27 am

Have her call the bank and cancel the check immediately. She will never see that money again.

Friends don't ask friends for money. If one of my friends did this, I would tell them where to put it.
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Re: Mom just lent 40k to a friend w/o a contract

Postby ML 59 » Fri Jul 12, 2013 8:31 am

I hope that your Mother's friends don't have similar outstanding debt to friends on the other two rental properties.

They have 300k in equity on their house, buying a rental property not worth the loan amount requested, and are preying on friends.

Your mother needs a contract quickly.

I truly hope that this works out.
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Re: Mom just lent 40k to a friend w/o a contract

Postby frugaltype » Fri Jul 12, 2013 8:37 am

I would not loan money to a friend for a business investment, which is what this is. A friend whose friendship depends on this is already not a friend.

I would stop payment on that check immediately until there is a signed contract. Your Mom can blame it on you. If the friends are upset, a good reason to not carry through on the loan.

Lending money to a friend in a very tight spot (serious illness, etc.) is another matter. I'd do that with no expectation of getting it back.
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Re: Mom just lent 40k to a friend w/o a contract

Postby bottlecap » Fri Jul 12, 2013 9:17 am

AllySK wrote:
countdown wrote:Friend must sign a notarized Note for $40k @ 8percent payable in full in one year, and it should be recorded against the property. This is a very inexpensive procedure and well worth the cost.


Thanks! Can you specify how it is "recorded against the property"? Is this something I can draft?


Possibly, but you could probably find a lawyer to do it for likely less than $250.

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Re: Mom just lent 40k to a friend w/o a contract

Postby ddunca1944 » Fri Jul 12, 2013 9:41 am

AllySK wrote:
countdown wrote:Friend must sign a notarized Note for $40k @ 8percent payable in full in one year, and it should be recorded against the property. This is a very inexpensive procedure and well worth the cost.


Thanks! Can you specify how it is "recorded against the property"? Is this something I can draft?


My husband and I loand my son$80K to buy a house (no mortgage as son put uo the rest of the funds). He signed (and notarized a promisory note) and asked the title company to record a lien against the property in my name. Did not cost me anything. The note, a copy of the lien and a record of his repayments are with our wills.
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Re: Mom just lent 40k to a friend w/o a contract

Postby frugaltype » Fri Jul 12, 2013 9:56 am

ddunca1944 wrote:
AllySK wrote:
countdown wrote:Friend must sign a notarized Note for $40k @ 8percent payable in full in one year, and it should be recorded against the property. This is a very inexpensive procedure and well worth the cost.


Thanks! Can you specify how it is "recorded against the property"? Is this something I can draft?


My husband and I loand my son$80K to buy a house (no mortgage as son put uo the rest of the funds). He signed (and notarized a promisory note) and asked the title company to record a lien against the property in my name. Did not cost me anything. The note, a copy of the lien and a record of his repayments are with our wills.


My state is requiring people to install advanced septic systems in some circumstances unless a sewer system is planned within a certain amount of time. I got an extension from the state office, since the latter is the case. Their letter directed me to have the extension recorded at the town clerk's office and send the state a copy of the stamped recorded paperwork. I just went to the town hall, they did that for a fee of (I forget) about $70. I assume this shows up during a title search if the property is for sale.
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Re: Mom just lent 40k to a friend w/o a contract

Postby archbish99 » Fri Jul 12, 2013 10:06 am

IIRC, though, some states have laws prohibiting people who aren't licensed mortgage lenders from writing secured loans with real estate. A lawyer could advise.

You can certainly find some templates for an unsecured note online; if you want a secured note, you'll want an attorney to be absolutely sure it's done properly.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Calm Man » Fri Jul 12, 2013 11:07 am

I lent $25,000 to my best friend of 45 years a few years ago. It was unsecxured. It was for personal needs. He paid me back. When I made the loan I recognized I might not get it back. In this situation, your mother was to be perfectly brutal, misguided. This was a loan not to help them out of a tough spot or stay in a house. It was for an investment. WHy on God's earth would she need to be the financier of a business loan? Are you kidding? She should have just said what any more grounded person would say: "I don't have the cash available. You are such a great friend that if you were in personal trouble I would borrow to help you out, but obviously can't do that for a business loan>" But now I think she is basically stuck.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Quickfoot » Fri Jul 12, 2013 11:16 am

She wasn't stupid, she made a choice and it sounds like she did it with full knowledge of the potential risk. It may not be a decision most of us would make but that doesn't make someone stupid. It's important to realize it isn't the mom that's freaking out, it's her child. If she is concerned about it now she needs some sort of loan agreement notarized. E-mail is not going to work for enforcement, anyone can forge e-mail and in my legal battles with my ex wife I got e-mails thrown out for that reason, same thing with text messages, the only way they carry any weight is if you can get them to admit under oath they sent them and then it's their testimony that they said it that counts, not the original email / text message.

Generally loaning money to friends results in either losing the friend or losing the money but hopefully it works out for her. It sounds like the friendship was worth the risk to her and she knew what she was doing so don't worry about it too much, most people think anyone invested in the stock market is nuts.
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Re: Mom just lent 40k to a friend w/o a contract

Postby englishgirl » Fri Jul 12, 2013 11:21 am

I don't think people should be calling the OP's mother stupid. From the post, it appears that she recognizes that she may well lose all the money. That shows to me that she is well aware that she may never be paid back, but views the friendship as being worth more to her. You may disagree whether she can afford to lose this money or not, but it appears that she has at least thought it through to some extent.

In my view, sometimes with family and good friends you just end up giving them money, and it's hard not to. Now, if the friend doesn't pay the money back, she's probably lost the friendship AND the money. But I suppose at least mom won't feel it was her fault that the friendship failed, due to refusing to loan the money, but instead the friend's fault.
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Re: Mom just lent 40k to a friend w/o a contract

Postby DetroitRed » Fri Jul 12, 2013 11:47 am

My mother lent her brother a lot of money about 15 years ago (was over 30k) for his business.

I advised her to have an attorney prepare a formal promissory note and to try and become a beneficiary of his life insurance policy. She had a promissory note prepared (he never signed) and he never changed his life insurance policy.

Fast forward 15 years. His business failed and he never paid any of the money back.

However, in the intervening years he has quit drinking and gambling (which was a large reason why he had multiple businesses fail) and he and my mother are very still very close.

Luckily she doesn't need the money, so it's now water under the bridge. I wouldn't consider it a lesson learned, because I was about 99% sure at the time that my mother would never get paid back (and even though she never said it, I'm sure my mother viewed it the same way).
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Re: Mom just lent 40k to a friend w/o a contract

Postby soaring » Fri Jul 12, 2013 12:09 pm

45 yrs ago I loaned a couple $300 so they could buy Christmas gifts for their kids. They just arrived in Europe in the military and money hadn't caught up with them....well of course they would not pay a dime for over a yr. When I spoke to his commander he began paying $5 a month and required I sign for receiving each pmt. I think $60 was total I received.

Needless to say it was the best and cheapest lesson of my life..never loaned a dime since!
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Re: Mom just lent 40k to a friend w/o a contract

Postby Abe » Fri Jul 12, 2013 1:33 pm

AllySK wrote:
countdown wrote:Friend must sign a notarized Note for $40k @ 8percent payable in full in one year, and it should be recorded against the property. This is a very inexpensive procedure and well worth the cost.


Thanks! Can you specify how it is "recorded against the property"? Is this something I can draft?


First, let me say that I am not a lawyer, but I have had experience in these matters.
Each state may be different, but this is how it works where I live. The note is the promise to pay (promissory note). It is usually not notarized because it is not necessary to record the note. The mortgage or trust deed creates the lien on the property and it is recorded. If your moms friends used a home equity loan on their primary residence to borrow the $300,000. and did not mortgage the subject property the (rental property) and assuming their are no other liens against the subject property, then your mom would be in a first mortgage position if she recorded a mortgage on the property. She would need a promissory note and a mortgage from her friends, and she probably should have a title search done on the property to be sure there are no other liens on the property. If she does this, she should be in pretty good shape with a first mortgage on a $340,000. property. All of this could be done at the closing or she could get a title company or lawyer to do it. If it was me, I would stop payment on the check and resubmit it after all of the above has been done. If she gets a note only then all she has is her friends promise to pay, but no lien of the property. She would be in a much better position if she had both the note and mortgage. Again, please don't consider this as legal advise. I'm just telling you what I would do if it were me.
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Re: Mom just lent 40k to a friend w/o a contract

Postby lindisfarne » Fri Jul 12, 2013 11:40 pm

Gnirk wrote:Yes, you can lose a friend by loaning them money. 15 years ago, my husband (against his own better judgment), joined with a group of friends , and each loaned $10,000 to another friend to help save his business. (All were in the same business, in different cities, and were also all friends for many years). Of course, the friend told everyone "if it's the last thing I do I will pay you all back, with interest".

The friend lost his business, declared bankruptcy, went to work for a large box store as a manager, and we never even received a Christmas card from him.

If they were good friends & there was nothing to suggest that this friend would deliberately try to deceive all his other friends: it could be that this friend tried, didn't succeed, and now is so embarrassed & shamed he does not know how to reach out to his old friends, and perhaps does not feel deserving of their friendship. Of course, if friend is now financially quite well-off, and does not remember the promise to pay his friends back, that is a different thing. If that's not the case, I'd tend to give him the benefit of the doubt & go with the shame/embarrassment explanation. Perhaps he still does intend to pay everyone back if he ever can. It would help if he'd mail everyone $500 or $1000 (assuming he is financially able) as a symbol of his intention.

But, I agree: don't lend friends money (well, more than $50), unless you view it as a gift from the very first second.
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Re: Mom just lent 40k to a friend w/o a contract

Postby lindisfarne » Fri Jul 12, 2013 11:42 pm

soaring wrote:45 yrs ago I loaned a couple $300 so they could buy Christmas gifts for their kids. They just arrived in Europe in the military and money hadn't caught up with them....well of course they would not pay a dime for over a yr. When I spoke to his commander he began paying $5 a month and required I sign for receiving each pmt. I think $60 was total I received.

Needless to say it was the best and cheapest lesson of my life..never loaned a dime since!

Why would anyone need $300 45 years ago to buy gifts for their kids? $20 would have been more than enough.

As for the OP: if mom's friend's rental business was going well, they would have had the $ for the downpayment. It's a bad sign that the bank felt they weren't a good risk. Best you can do is to try to get them to sign a written contract. Oral contracts are not valid for real estate purposes, in most, if not all, states.
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Re: Mom just lent 40k to a friend w/o a contract

Postby justus » Sat Jul 13, 2013 2:31 am

AllySK wrote:Ultimately, even though I think it's a terrible idea, it's her money, and it's already done. At this point, I think the only thing I can do is write up a contract for her and the friends to sign. I started Googling some private loan contract forms. Does anyone have any advice? I feel like private loan contracts might be difficult to enforce. But obviously better than nothing. I mentioned getting a lien on the house but I don't know if that's possible, and it would probably involve more legalese than she's willing to do. Any advice would be appreciated.


Has your mom asked you for help? Do you contribute to your mom's finances?

If I were to butt into my parents' financial affairs like you are doing, they'd kindly tell me to go to hell.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Perpetual » Sat Jul 13, 2013 7:04 am

InvestorNewb wrote:Have her call the bank and cancel the check immediately. She will never see that money again.

Friends don't ask friends for money. If one of my friends did this, I would tell them where to put it.


Let's not talk in absolutes. Not only is this different from culture to culture, but there are situations that can warrant someone lending money to a friend. What if said friend lost their job or was in a healthcare-related emergency?

That said, I agree with most other people here in this non-emergency context. 40k is a lot of money and there needs to be something more official than an email agreement.
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Re: Mom just lent 40k to a friend w/o a contract

Postby dickenjb » Sat Jul 13, 2013 8:49 am

Abe wrote:First, let me say that I am not a lawyer, but I have had experience in these matters.
Each state may be different, but this is how it works where I live. The note is the promise to pay (promissory note). It is usually not notarized because it is not necessary to record the note. The mortgage or trust deed creates the lien on the property and it is recorded. If your moms friends used a home equity loan on their primary residence to borrow the $300,000. and did not mortgage the subject property the (rental property) and assuming their are no other liens against the subject property, then your mom would be in a first mortgage position if she recorded a mortgage on the property. She would need a promissory note and a mortgage from her friends, and she probably should have a title search done on the property to be sure there are no other liens on the property. If she does this, she should be in pretty good shape with a first mortgage on a $340,000. property. All of this could be done at the closing or she could get a title company or lawyer to do it. If it was me, I would stop payment on the check and resubmit it after all of the above has been done. If she gets a note only then all she has is her friends promise to pay, but no lien of the property. She would be in a much better position if she had both the note and mortgage. Again, please don't consider this as legal advise. I'm just telling you what I would do if it were me.


Abe is correct. The mother needs both a note and a mortgage deed. Interestingly many people say they are paying off their "mortgage". They are actually paying off a note which is the document evidencing the debt. The mortgage document pledges the real estate as security against the note.
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Re: Mom just lent 40k to a friend w/o a contract

Postby BigFoot48 » Sat Jul 13, 2013 10:26 am

Since the friend in the OP didn't provide a promissory note from the get-go and plan on recording it as a lien on the property as any responsible borrower would do, I would assume the chances of it being repaid are low. What exactly will change in the borrowers' situation in one year that would allow them to repay it? Probably nothing.

It's likely the money and the are lost, but do post in a year or two and let us know how it turned out.
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Re: Mom just lent 40k to a friend w/o a contract

Postby MrMiyagi » Sat Jul 13, 2013 10:29 am

Maybe this is a cultural thing, but my mom (Chinese) has routinely loaned large sums of money to family/friends and gotten paid back most of the time in a timely matter. I think a few times it took her a few calls but she did get paid back eventually. I think this is routinely done in a lot of cultures (especially immigrant ones), usually to start businesses, buy homes, etc...

However most of these loan stories that involve Americans tend to end badly...either never getting paid back and/or losing the friend due to hounding them to repay. In my family, I know of people who has loaned large sums (50k+) to Americans and they ran off and never paid back. So I totally understand the OP's anxiety. I would want a contract too.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Calm Man » Sat Jul 13, 2013 11:33 am

MrMiyagi wrote:Maybe this is a cultural thing, but my mom (Chinese) has routinely loaned large sums of money to family/friends and gotten paid back most of the time in a timely matter. I think a few times it took her a few calls but she did get paid back eventually. I think this is routinely done in a lot of cultures (especially immigrant ones), usually to start businesses, buy homes, etc...

However most of these loan stories that involve Americans tend to end badly...either never getting paid back and/or losing the friend due to hounding them to repay. In my family, I know of people who has loaned large sums (50k+) to Americans and they ran off and never paid back. So I totally understand the OP's anxiety. I would want a contract too.


I would be careful not to generalize. Not all Americans shirk their loans and not all Chinese pay back their loans. In fact I am unaware of any group that always does anything right or wrong.
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Re: Mom just lent 40k to a friend w/o a contract

Postby dm200 » Sat Jul 13, 2013 12:08 pm

Let me point out an aspect of this that goes beyond trusting a friend, etc. Suppose the friend has a medical "issue" and dies or becomes disabled to the point of not being competent to handle anything financial. Your mom is, almost certainly, in that case totally out of luck. If there were, though, some kind of written agreement, in such a case, then there would be some degree of the ability to collect the money.
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Re: Mom just lent 40k to a friend w/o a contract

Postby camden » Sat Jul 13, 2013 12:46 pm

Get an attorney for advice as to how to protect her rights as much as possible.

Then you, and she, should mentally assume that this money is lost, irrevocably, and that you will never see it again. If this assumption should prove, happily, to be wrong, so much the better. But don't count on it.

And, most importantly, don't do it again.
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Re: Mom just lent 40k to a friend w/o a contract

Postby FrugalInvestor » Sat Jul 13, 2013 1:12 pm

I did something similar to what your mom did once. I, however, was relatively young and the money I loaned was pretty much all I had. I did have earning power for years to come though, so a different situation than your mom. The person I loaned the money to was not only a long time friend but someone who had provided me with abundant career opportunity. I felt that I owed him something for his demonstrated faith in me. He had lost his business and was attempting to start another one.

My attitude going in was that the money was gone and I ever saw part or all of it returned it would be a bonus. I think this is the only way to approach a loan to a family member or friend. If you can't stomach that then you shouldn't be loaning the money. If that is your approach then no paperwork is required.

As it turned out the business failed but years later I was paid back the principal with no interest. The verbal agreement was that interest would be paid. I was elated that the money was repaid and it served to reinforce my already high opinion of this person, but had it not been our friendship would not have been damaged in any way.

I understand your concern about the loan your mom made, however, if the friendship is truly more important than the money then no paperwork may be required.
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Re: Mom just lent 40k to a friend w/o a contract

Postby pennstater2005 » Sat Jul 13, 2013 1:36 pm

Your mom knows it's a bad idea yet lent the money anyway. I would stay uninvolved.
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Re: Mom just lent 40k to a friend w/o a contract

Postby BolderBoy » Sat Jul 13, 2013 6:52 pm

soaring wrote:Needless to say it was the best and cheapest lesson of my life..never loaned a dime since!

When I was a kid at basic training in the USAF in the 1960s, one of the first things they told us was DO NOT loan any money to anyone, no matter what (we only earned about $70/month.) The barracks had bunk beds and the guy who slept above me was a smooth talking Southern boy who managed to cajole a lot of us to loan him small amounts.

About 3 days before basic training was over, I asked him for the money back. He basically said, "Sucker." Apparently he said that to everyone who loaned him money. The next day, a bunch of the other guys came to me and said to not interfere with the "party" they had planned for him that evening.

A blanket over his head and a baseball bat broke dozens of his bones. When the investigators came, no one had seen or heard anything. Due to the Vnam War sizzling along, they couldn't hold up our being sent to our further training stations and I never heard more about it.

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Re: Mom just lent 40k to a friend w/o a contract

Postby lindisfarne » Sat Jul 13, 2013 11:21 pm

pennstater2005 wrote:Your mom knows it's a bad idea yet lent the money anyway. I would stay uninvolved.

It really depends. One thing that happens with some as they age is they become more vulnerable to pressure from others. Some salesperson convinces them to buy something they really don't need; they get sucked into adds on the internet, in the newspaper, and so on. It doesn't happen to everyone, but it is something that is seen with people as they age. If this sort of behavior is becoming more common in an aging parent (or if it is completely out of character for them to lend a large sum of money), I'd be concerned. The parent in general could seem to be functioning well, just becoming a little more impulsive & subject to pressure.

One also could assume that mom telling child is an indirect way of mom asking child to find some way to rectify the situation, or mom really being unsure.
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Re: Mom just lent 40k to a friend w/o a contract

Postby AllySK » Sun Jul 14, 2013 12:58 am

OP here. Sorry for not being responsive - been particularly busy these past few days. I appreciate all the comments (especially the personal anecdotes and advice about the documents needed). I've been talking to my mom and will post a more detailed follow-up later. She's completely confident that even if things go bad, her friend (basically best friend) will find a way to pay her back, and she has no desire to get a lawyer involved. (Though she acknowledges that if she were advising someone else, she would suggest the same thing). The most she wants to do is allow me to draft an agreement and ask them sign it.
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Re: Mom just lent 40k to a friend w/o a contract

Postby thebogledude » Sun Jul 14, 2013 1:15 am

AllySK wrote:The most she wants to do is allow me to draft an agreement and ask them sign it.


If the term is for one year, then the lenders are confident about the market and paying your mom back. I would draft a promissory note and act as the go-between your mom and her friend, that way your mom would not seem to be worried about lending the money and you are the son looking out for your mom's interest. Also, one interesting point is how did they come up with $340K if the banks couldn't assess that high of value on the property.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Watty » Sun Jul 14, 2013 1:38 am

The money concerns aside;

She needs to get the relationship clear that it is a loan so that if there is a problem and a lawsuit with the house then she is not considered a part owner of the house.

The problem is that if a tenant is hurt or something then she could be sued as an owner of the property. The laws on this vary a lot but if there is a big lawsuit that is lost and the friends are unable to pay, then in some situations she might have to pay a lot to settle the lawsuit, and pay a lot of legal fees.

She also needs the paperwork so that if something happens like the friends are killed in a car crash, then should could get the money from the estate.

If there is a tax audit then the money might be considered a gift without any loan documents and she could have to pay gift taxes on it.
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Re: Mom just lent 40k to a friend w/o a contract

Postby thebogledude » Sun Jul 14, 2013 1:51 am

Watty wrote:The money concerns aside;

She needs to get the relationship clear that it is a loan so that if there is a problem and a lawsuit with the house then she is not considered a part owner of the house


I'm not the OP but my understanding is these things are very informal, I wouldn't expect her to be named on the deed let alone have liability in the property. Another point to bring up is the banks did not approve the initial loan because the house was not worth the amount 340k which could present a problem in determining value should a lawsuit arise.
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Re: Mom just lent 40k to a friend w/o a contract

Postby EmergDoc » Sun Jul 14, 2013 2:10 am

BolderBoy wrote:
A blanket over his head and a baseball bat broke dozens of his bones. When the investigators came, no one had seen or heard anything. Due to the Vnam War sizzling along, they couldn't hold up our being sent to our further training stations and I never heard more about it."


That's quite a story. I'm curious what your thoughts were then about it and whether that's changed in the last 50 years.
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Re: Mom just lent 40k to a friend w/o a contract

Postby freebeer » Sun Jul 14, 2013 7:15 am

You left out an important point: impact of the potential loss. It's one thing if the $40K is Mom's life savings, and quite another if her net worth is $10M. Either way it makes sense to get the loan recorded as a lien against the rental house, but if Mom is wealthy and strongly prefers to operate on a "handshake" basis for what is essentially a off-the-books hard money loan I'd say butt out - it's her money and it if it goes wrong it won't materially change her lifestyle. OTOH if Mom's put her life savings or a substantial fraction thereof into this then I think she's being seriously taken advantage of unless it's all properly documented, and your help to set it right would seem warranted.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Sheepdog » Sun Jul 14, 2013 7:43 am

If my child questioned my finances, I would be frank that it was my decision. I don't question theirs, unless asked, and the same goes for mine. I may not have done the smart thing, in their opinion, but it was something that I wanted to do.
But, then again, they would never know what I do with my money, so that would never come up.

Have I ever "loaned" money to a relative or friend who promised to pay it back, but they didn't? Yes, to a niece and an acquaintance, but I was not surprised they did not. We just aren't close any longer.
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Re: Mom just lent 40k to a friend w/o a contract

Postby dm200 » Sun Jul 14, 2013 10:03 am

The decision of an adult child to intervene, advise, interfere with, etc. a parent's financial decisions and choices can often be very difficult. On the one hand, the parent should be able to make the choices he/she wants. On the other hand, scams, elder abuse and failing faculties enter in. A few years ago, my father "lent" significant sums to an acquaintance over a period of several years. Eventually, especially as my father started to slip a bit, my brother became aware of this and intervened. Due to my brother's persistence, it turned out ok. In this process, though, it was discovered that this acquaintance and the money was involved with a relative of his who was a known crook.
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Re: Mom just lent 40k to a friend w/o a contract

Postby freebeer » Sun Jul 14, 2013 10:14 am

dm200 wrote:The decision of an adult child to intervene, advise, interfere with, etc. a parent's financial decisions and choices can often be very difficult. On the one hand, the parent should be able to make the choices he/she wants. On the other hand, scams, elder abuse and failing faculties enter in. A few years ago, my father "lent" significant sums to an acquaintance over a period of several years. Eventually, especially as my father started to slip a bit, my brother became aware of this and intervened. Due to my brother's persistence, it turned out ok. In this process, though, it was discovered that this acquaintance and the money was involved with a relative of his who was a known crook.


This is precisely why I suggested a material factor iin decision whether or not to try to intervene is the % of the OP's Mom's net worth the loan represents.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Abe » Sun Jul 14, 2013 12:05 pm

thebogledude wrote:
AllySK wrote:The most she wants to do is allow me to draft an agreement and ask them sign it.


If the term is for one year, then the lenders are confident about the market and paying your mom back. I would draft a promissory note and act as the go-between your mom and her friend, that way your mom would not seem to be worried about lending the money and you are the son looking out for your mom's interest. Also, one interesting point is how did they come up with $340K if the banks couldn't assess that high of value on the property.


I agree with this advise. At the very least, I would have them sign a promissory note something like this:
A Sample Promissory note
__________________ ___________________________ _______________
City State Date

(Borrower) agrees and promises to pay to (Lender) the sum of ($ ) Dollars for value received, with interest at the annual rate of % payable after (Date)
If this note is in default and is placed for collection, (Borrower) shall pay all reasonable costs of collection and attorneys’ fees.
____________________________ Permanent address _________________________________
(Borrower’s signature) (Date)
____________________________ Permanent address_________________________________
(Lender’s signature) (Date)
_________________________________
(Signature of the Witness)

This is just a simple promissory note form I found online that you might use or something similar. Your mom would not have a lien on the property with just the note only, but it's better than nothing. If borrower defaults, she could at least sue them and get a judgement. Again, I am not a lawyer.
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Re: Mom just lent 40k to a friend w/o a contract

Postby ddunca1944 » Sun Jul 14, 2013 2:36 pm

freebeer wrote:You left out an important point: impact of the potential loss. It's one thing if the $40K is Mom's life savings, and quite another if her net worth is $10M. Either way it makes sense to get the loan recorded as a lien against the rental house, but if Mom is wealthy and strongly prefers to operate on a "handshake" basis for what is essentially a off-the-books hard money loan I'd say butt out - it's her money and it if it goes wrong it won't materially change her lifestyle. OTOH if Mom's put her life savings or a substantial fraction thereof into this then I think she's being seriously taken advantage of unless it's all properly documented, and your help to set it right would seem warranted.


+1

Another question is whether this behavior is out of character for the OP's mother. If she is elderly and starts to behave out of character in terms of finances, I'd be concerned that she may be losing her mental acumen.

Another argument for at least obtaining a promissory note is that she may be able to take a tax deduction for a bad loan if the friend should default.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Rodc » Mon Jul 15, 2013 11:19 am

dm200 wrote:The decision of an adult child to intervene, advise, interfere with, etc. a parent's financial decisions and choices can often be very difficult. On the one hand, the parent should be able to make the choices he/she wants. On the other hand, scams, elder abuse and failing faculties enter in. A few years ago, my father "lent" significant sums to an acquaintance over a period of several years. Eventually, especially as my father started to slip a bit, my brother became aware of this and intervened. Due to my brother's persistence, it turned out ok. In this process, though, it was discovered that this acquaintance and the money was involved with a relative of his who was a known crook.


bold added

How does this apply (also mentioned by another poster).

She is in her 50s, not 80's or 90's.
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Re: Mom just lent 40k to a friend w/o a contract

Postby Rodc » Mon Jul 15, 2013 11:20 am

Abe wrote:
thebogledude wrote:
AllySK wrote:The most she wants to do is allow me to draft an agreement and ask them sign it.


If the term is for one year, then the lenders are confident about the market and paying your mom back. I would draft a promissory note and act as the go-between your mom and her friend, that way your mom would not seem to be worried about lending the money and you are the son looking out for your mom's interest. Also, one interesting point is how did they come up with $340K if the banks couldn't assess that high of value on the property.


I agree with this advise. At the very least, I would have them sign a promissory note something like this:
A Sample Promissory note
__________________ ___________________________ _______________
City State Date

(Borrower) agrees and promises to pay to (Lender) the sum of ($ ) Dollars for value received, with interest at the annual rate of % payable after (Date)
If this note is in default and is placed for collection, (Borrower) shall pay all reasonable costs of collection and attorneys’ fees.
____________________________ Permanent address _________________________________
(Borrower’s signature) (Date)
____________________________ Permanent address_________________________________
(Lender’s signature) (Date)
_________________________________
(Signature of the Witness)

This is just a simple promissory note form I found online that you might use or something similar. Your mom would not have a lien on the property with just the note only, but it's better than nothing. If borrower defaults, she could at least sue them and get a judgement. Again, I am not a lawyer.


Bold added: pay after date seems open ended. I would think pay by date would be desired.
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