As a private money lender working with real estate investors, you can never be too careful about the person you choose to invest in. It is true that if the borrower defaults, you have security because you will then own the property. It is also true that repossessing a property is a huge hassle and incredibly time consuming. By using these simple techniques you will stay out of a courtroom and still make a big profit for your time and investment.
- Know your borrower. Recommended questions include:
- What kind of job does he have?
- How long has he worked there?
- How long has he been investing in real estate?
- How many real estate deals does he complete per year?
- What is his minimum profit in order to take on a rehab?
- How long has his average rehab lasted from start to finish?
- What does he profit per flip, on average?
- Get references. Calling references is one of the best things you can do to get to know a person. Check the borrower’s professional references. This can include real estate agents, home buyers or sellers, other real estate investors, and so forth. If the borrower has a full-time job and does his real estate investing on the side, call his employer for a reference. Ask questions about the borrower’s reliability to get a good judge of his character.
- Get the borrower’s credit score and a background check.
- What is his credit score? I do not focus too intensely on credit, but I do always check it. If they have some dings, that is to be expected, because if the borrower’s credit score was perfect, then he would probably be able to get a traditional loan at a much cheaper cost and wouldn’t need my investment.
- Background check? You can pay for a background check using the Internet or go down to your local courthouse for free and do a local check. Anytime they have been sued in that county, or been arrestedit will be on the background check. This holds a lot of weight when it comes to the decision of whether to invest in this person or not.
- Know the borrower’s plans for the property. If he plans on flipping it, I require a detailed plan of how he intends to accomplish this goal. I also require a plan for what he will do if after a certain amount of time on the market the property does not sell. Is he willing to be a landlord? If not, how does he intend on paying the mortgage every month? These are very important questions that need to be answered, and if the borrower lacks the necessary knowledge to respond to these questions with a well thought-out and precise answer, then it would be better not to invest with them. You will end up doing most of the work because they lack the expertise to do so.
Remember, there are lots and lots of opportunities for private money lenders to make money through real estate. There is NO reason to risk your money. By following these simple guidelines, you will keep your investment safe and enjoy a lot of success.