real estate investor

Private Money Lending: Rules to Follow When Choosing a Borrower

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.

Rules to Follow with Private Money Lending

Private money lending involves YOU as the private money lender and another person or organization as the borrower. When you are a private money lender for real estate investment deals, you are protected by the loan-to-value ratio and the fact that you will own the house if the investor walks. Even so, follow these rules to make sure you are completely protected:

  • Make sure the property has INSTANT EQUITY. Look for lots of room between value and price. To protect your investment money, avoid risking it on a property priced at or above the market value; it is not worth the risk. Choose properties that can easily be resold.
  • Have a clear contract and plan of action. Put everything involved in the deal on the loan papers. If the borrower is required to put a certain amount of the loan into repairing the property, include these requirements on the loan documents and specify the date the work is to be completed. To protect yourself in case the borrower fails to complete the work, include such ramifications as a late charge, spike in interest rate, or even calling the loan due and payable. If the borrower is not able to come up with the whole amount, you can foreclose and take the property back, citing specific performance. The point is, you must keep excellent documentation of who is supposed to do what in the transaction, and be sure it is clear and admissible in court. You want it clear enough that you can show a judge and they will understand exactly what was agreed to.
  • Don’t let your emotions get in the way. The only numbers that matter are the comparable sales, comparable listings, and the amount of money you are making on the deal. Don’t let attachments to the house or the borrowers get you into financial trouble.
  • Always use an escrow officer. We cannot stress this enough. For the couple of hundred dollars it will cost you, not only will you have a professional handling the closing of your investment, but also you will have title insurance. That way, you can be sure that the property you are buying has a clean title, does not have past liens or encumbrances, and that all the paperwork is structured exactly how you and the borrower have agreed upon.
  • Always use a neutral party to keep track of payments made. An escrow company usually has the option of having all payments made by the borrower go into an escrow account that accumulates or is released to you on a set schedule, whichever you prefer. This usually costs under $5 per month and it keeps everybody on the same page.
  • Review everything with an attorney. Make sure you review everything – even this article – with an attorney before making any financial decisions. Laws and restrictions are changing all the time, so make sure you get the latest information with a qualified local attorney.

Have other suggestions to keep yourself protected? Include them in the comments below!