SECURITY AGREEMENT

This Security Agreement (this “ Agreement ”) dated the 20 ^th day of August, 2008, is made by United Development Funding, L.P., a Delaware limited partnership, formerly a Nevada limited partnership (the “ Borrower ”), in favor of United Development Funding III, L.P., a Delaware limited partnership (the “ Lender ”).

A.           Borrower has executed and delivered to Lender that certain Secured Line of Credit Promissory Note in the principal amount of $45,000,000.00, dated the date of this Agreement (the “ Note ”).

B.           It is a condition precedent to Lender’s advancing of funds under the Note that Borrower shall have granted the security interests contemplated by this Agreement.

NOW, THEREFORE, in consideration of the premises and in order to induce Lender to advance funds under the Note, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Borrower and Lender agree as follows:

1.            Grant of Security; Subordination .                                                                           This Agreement is hereby made subject to the Note and all of its terms and conditions.  All capitalized terms used but not defined in this Agreement shall have the respective meanings given to such terms in the Note.  This Agreement hereby is made subordinate to the Senior Debt.  Subject to the foregoing, Borrower hereby assigns, pledges and grants to Lender for its benefit, a continuing security interest in all of Borrower’s right, title and interest in and to the following (collectively, the “ Collateral ”), wherever located and whether now owned or hereafter acquired:

(a)           all promissory notes, mortgages and contracts for deed and/or installment contracts in which Borrower owns a full or partial interest, including, without limitation, all related loan documents evidencing such promissory notes, mortgages, and contracts for deed and/or installment contracts, all deeds of trust or other instruments creating a mortgage lien on an estate in fee simple in real property and the improvements thereon, all guarantees, all security agreements, all assignments and all title policies, insurance policies, and security interests related to any of the foregoing and the rights to receive payment thereon (all such interests and documents evidencing such interests are referred to herein collectively as the “ Mortgages ”).

(b)           all cash on hand, including, without limitation, cash held in bank accounts, brokerage accounts, certificates of deposit, and other depositories, all accounts receivable owing to Borrower by any person or entity, including all such amounts due Borrower under the Mortgages, and all security for payment thereof, and in and to all the proceeds, monies, income, instruments, securities, accounts, benefit, collections, tax refunds, insurance proceeds, and products thereof and thereon and attributable or accruing thereto;

(c)           all of Borrower’s interest in all equipment, inventory, materials, computer software and records, goods, and other personal property owned by Borrower now or in the future, and all documents and receipts covering such property, and all licenses and permits used or held for use in connection with such property;

(d)           all patents, trademarks, service marks, copyrights, licenses, and all other intellectual property owned by Borrower (collectively, the “ Intellectual Property ”), and all agreements and contracts to which Borrower is a party regarding the use and exploitation of any  of the Intellectual Property and applications therefor, now owned or hereafter acquired by Borrower;

(e)           all of Borrower’s contract rights and other general intangibles relating to any of the Collateral, including, without limitation, all license agreements;

(f)           all of Borrower’s interest in any subsidiary company, and all capital stock, equity interests, partnership interests, and membership interests and all warrants, options and other rights to purchase any such interests, in any other corporation, partnership, limited liability company or other business entity;

(g)           all books and records (including electronic records, computer disks, tapes, printouts and other storage media) relating to any of the foregoing; and

(h)           all of Borrower’s interest in the proceeds of any sale or disposition of any of the foregoing, and in and to any and all money, documents, instruments, securities, or accounts owned or belonging to Borrower.

Borrower shall be deemed to have possession of any of the Collateral in transit to it or set apart for it or for any of its agents, affiliates or correspondents.

2.            Security for Obligations .  This Agreement and the security interest created hereby secures the prompt and complete payment, observance and performance of all duties, liabilities, obligations and Indebtedness of every kind, nature and description owing by Borrower to Lender, fixed or contingent, joint or several, whether as principal, surety, endorser, guarantor, or otherwise, now existing or hereafter arising, and all modifications, extensions, renewals, replacements, and increases of each of the foregoing, including, without limitation, those arising under this Agreement, the Note and the other Loan Documents (all such obligations and liabilities of Borrower being the “ Obligations ”).

3.            Borrower Remains Liable .  Notwithstanding anything to the contrary contained in this Agreement: (a) Borrower shall remain liable under the contracts and agreements included in the Collateral and obligated to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Lender of any of its rights hereunder shall not release Borrower from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Lender shall have no obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall Lender be obligated to perform any of the obligations or duties of Borrower thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

4.            Representations and Warranties .  In addition to any representations and warranties set forth in any other Loan Document, from the date hereof and until the Indebtedness hereunder is fully paid and Lender has no further obligation to extend any Advances hereunder, Borrower represents and warrants as follows:

(a)           Borrower’s interest in the Collateral is free and clear of any lien, security interest, charge or encumbrance of any kind whatsoever (collectively, “ Liens ”) except for the security interest created hereby in favor of Lender and for security interests securing the Senior Debt.  No effective financing statement, continuation statement or amendment thereto promulgated under the Uniform Commercial Code of any state (collectively, “ Financing Statements ”) or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of Lender or as may be filed in evidence of the Senior Debt.  The validity of the Collateral in whole or in part, and Borrower’s title thereto is not currently being questioned in any litigation or regulatory proceeding to which Borrower is a party, nor is any such litigation or proceeding threatened.

(b)           This Agreement creates a valid and perfected security interest in the Collateral, securing the payment of the Obligations, and all filings and other actions of Borrower necessary or desirable to perfect and protect such security interest have been, or will be upon request, duly taken by Borrower.

(c)           Except for any approvals required by the holders of the Senior Debt, no authorization, approval or other action by, and no notice to or other filing with, any governmental authority or regulatory body is required, either (i) for the grant by Borrower of the security interest granted hereby or for the execution, delivery or performance of this Agreement by Borrower, or (ii) for the perfection of or the exercise by Lender of its rights and remedies hereunder (other than the filing of Financing Statements and Assignments of Notes and Liens by Lender).

(d)           Set forth on Exhibit “A” attached to this Agreement is a list of (i) Borrower’s principal place of Business and all other places of business and offices of Borrower, and (ii) all places where Borrower’s books of account and records are kept, and all places where the Collateral is stored or located.

(e)           Concurrently with execution and delivery of this Agreement to Lender, Borrower has duly executed and delivered to Lender, the Assignment of Notes and Liens in the form attached to this Agreement as Exhibit “B ” for each county in which the Mortgages are located.  Such Assignments of Notes and Liens shall be held by Lender and not recorded for so long as no Event of Default exists.

5.            Covenants and Further Assurances .  In addition to any covenants set forth in any other Loan Document, from the date hereof and until the Indebtedness hereunder is fully paid and Lender has no further obligation to extend any Advances hereunder, Borrower covenants and agrees as follows:

(a)           Borrower agrees that from time to time, at the expense of Borrower, Borrower will promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary or desirable, or that Lender may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Lender to exercise and enforce rights and remedies hereunder with respect to any Collateral.  Without limiting the generality of the foregoing, Borrower will:  (i) within five (5) business days of a request by Lender, mark conspicuously each document included in the Collateral and each of its records pertaining to the Collateral, with a legend, in form and substance satisfactory to Lender, indicating that such document or Collateral is subject to the security interest granted hereby; (ii) within five (5) business days of a request by Lender, provide Lender with certified copies of any or all Mortgages included in the Collateral; (iii) within five (5) business days of a request by Lender, and subject to the rights of the holders of Senior Debt, if any, transfer to Lender actual possession of the original Mortgages, to the extent same are in possession or control of Borrower; (iv) within five (5) business days of a request by Lender, transfer, register or otherwise put any of the Collateral in the name of Lender or its nominee; and (v) execute and file such Financing Statements, and such other instruments or notices, as may be necessary or desirable, or as Lender may request, in order to perfect and preserve the security interest granted or purported to be granted hereby.

(b)           Borrower shall file or cause to be filed Financing Statements, assignments and all other instruments and documents as may be required to perfect Lender’s security interest in the Collateral and shall provide prompt evidence of having done the same to Lender.  To further secure Lender hereunder, Borrower hereby authorizes Lender to file one or more Financing Statements relative to all or any part of the Collateral without the signature of Borrower where permitted by law in form satisfactory to Lender in such office(s) as Lender deems appropriate.  A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law.  Debtor will pay the cost of filing financing statement(s) in all public offices wherever filing is deemed desirable by Lender.  This Agreement shall be terminated only by Lender’s filing of a termination statement in accordance with the applicable law of the office in which any financing statement is filed.

(c)           Borrower will take all actions and pay all costs to keep and maintain the validity, enforceability, security, priority and collectability of the Mortgages and will pay all other amounts which may be necessary or desirable to preserve, maintain and protect Lender’s interest in the Mortgages.

(d)           Borrower shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on Exhibit “A” , and shall not relocate such books of account and records and Collateral unless it delivers to Lender, prior written notice of such relocation and the new location thereof (which must be within the United States).  Borrower will furnish to Lender from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Lender may reasonably request, all in reasonable detail.

(e)           Borrower shall not conduct business under any name other than as appears in this Agreement nor change or reorganize the type of Borrower’s business entity, nor change the location of any of the Collateral without the prior written consent of Lender.  Borrower shall not transfer, sell or assign (by operating of law or otherwise) all or substantially all of Borrower’s assets or property without the prior written consent of Lender, except for in the ordinary course of Borrower’s business.

(f)           Borrower shall continue to conduct its business in the ordinary course and shall continue to collect and enforce all present and future payments due to Borrower, including without limitation, those payments due under the Mortgages.

6.            Insurance .

(a)           Borrower shall, at its own expense, maintain insurance with respect to the Collateral in such amounts, against such risks, in such form and with such insurers, as shall be reasonably satisfactory to Lender from time to time.  Borrower shall ensure that each of the Mortgages is, and remains, insured against loss by fire and other casualty in the full amount of the indebtedness secured by such Mortgage.   Each policy for property damage insurance shall provide for all losses to be paid on behalf of Lender and Borrower as their respective interests may appear.  Each such policy shall in addition (i) contain the agreement (if available) by the insurer that any loss thereunder shall, subject to the rights of the holders of the Senior Debt, be payable to Lender notwithstanding any action, inaction or breach of representation or warranty by Borrower, (ii) provide that there shall be no recourse against Lender for payment of premiums or other amounts with respect thereto, and (iii) provide that at least 10 days prior written notice of cancellation or of lapse shall be given to Lender by the insurer.  Borrower shall, if so requested by Lender, deliver to Lender original or duplicate policies of such insurance and, as often as Lender may reasonably request, a report of a reputable insurance broker selected by Borrower with respect to such i