This Blows My Mind For Those Acting A A Lender

[Chris Seveney]

Ok so this is something that honestly just completely blows my mind and I’m curious if I am the only one that is completely nuts or do others agree with me?

I continue to see more and more investors, either doing private, lending or investing in debt, not take into consideration the risk.

What do I mean by that? I am seeing people investing in opportunities where they are in a second or even unsecured position and are targeted to receive a net 1-2% above a 1st position lien.

For example,:

Option #1:

You receive a $50k first position lien $100k property - you are targeting to get a 9% return.

Option #2:

You are in 2nd position on the above deal and are $50k so 100% ltv and you are targeting to get 10%

Option #3: 

you give someone $50k and it unsecured for them to go out and buy an asset and you are targeting to get 13%.

I have literally seen several people over the last few days say they’re going to go option three because it provides the highest return. So curious if people think I’m nuts? We view the risk of a 2nd and would add 3-5% higher (min) for the risk and unsecured we would not even touch, but I would put it at 2x a second.

Curious to hear how others evaluate risk?

Also, if you know somebody who selected option number three and lost 100% of their money, would you feel bad for them?

[Russell Brazil]

Quote from @Chris Seveney:

Ok so this is something that honestly just completely blows my mind and I’m curious if I am the only one that is completely nuts or do others agree with me?

I continue to see more and more investors, either doing private, lending or investing in debt, not take into consideration the risk.

What do I mean by that? I am seeing people investing in opportunities where they are in a second or even unsecured position and are targeted to receive a net 1-2% above a 1st position lien.

For example,:

Option #1:

You receive a $50k first position lien $100k property - you are targeting to get a 9% return.

Option #2:

You are in 2nd position on the above deal and are $50k so 100% ltv and you are targeting to get 10%

Option #3: 

you give someone $50k and it unsecured for them to go out and buy an asset and you are targeting to get 13%.

I have literally seen several people over the last few days say they’re going to go option three because it provides the highest return. So curious if people think I’m nuts? We view the risk of a 2nd and would add 3-5% higher (min) for the risk and unsecured we would not even touch, but I would put it at 2x a second.

Curious to hear how others evaluate risk?

Also, if you know somebody who selected option number three and lost 100% of their money, would you feel bad for them?

 Is this any different than similar investors chasing yield in Cleveland, Kansas City or Baltimore over investing in Boston, DC or LA?

I said it 10 years ago when I was on the BP podcast, and it remains true today....the biggest mistake investors make is an inability to properly judge risk.