Thinking of becoming a private money lender? Vet your borrower properly!!

[Jonathan Chan]

If you're interested in adding real estate lends as another tool in your toolbox, these are the steps I've learned you should take to vet your borrower before looking at any of their opportunities!

• Background check
• Credit check
• Past performance. Look at purchase HUDS, statement of work if it was a renovation and the sale HUD to make sure they made money on the deal.
• An organized and easy to navigate borrower's package.
• Security documents to collateralize the loan against real, tangible property.

I also like to throw in some communication clauses with consequences for ghosting.

Cheers!

[Erik Estrada]

Can you elaborate what you mean by communication clauses?

[Jonathan Chan]

Quote from @Erik Estrada:

Can you elaborate what you mean by communication clauses?

Weekly updates AND a requirement for the borrower or someone from the borrower's team to respond within 24 hours of being contacted.

[Erik Estrada]

Quote from @Jonathan Chan:

Quote from @Erik Estrada:

Can you elaborate what you mean by communication clauses?

Weekly updates AND a requirement for the borrower or someone from the borrower's team to respond within 24 hours of being contacted.

 Interesting, 

I have not seen this done. Has this strategy worked for you?

[Chris Seveney]

@Jonathan Chan

I am all for communication - but how do you enforce that communications policy? You gonna put someone in default because they didn’t answer a phone? I

when underwriting we also want to know the exit strategy of the borrower to make sure they are not limiting themselves to a single exit

[Jonathan Chan]

Quote from @Chris Seveney:

@Jonathan Chan

I am all for communication - but how do you enforce that communications policy? You gonna put someone in default because they didn’t answer a phone? I

when underwriting we also want to know the exit strategy of the borrower to make sure they are not limiting themselves to a single exit

 I honestly don't know how enforceable it is, but 24 hours to respond to any sort of communication is more than reasonable in my opinion. Yes, we also make sure there are multiple exits. I personally like lending on BRRRRs because it's more predictable. You can do everything right on a flip and just have the timing be bad or just have it sit for no good reason.

[Kristi K.]

Quote from @Jonathan Chan:

If you're interested in adding real estate lends as another tool in your toolbox, these are the steps I've learned you should take to vet your borrower before looking at any of their opportunities!

• Background check
• Credit check
• Past performance. Look at purchase HUDS, statement of work if it was a renovation and the sale HUD to make sure they made money on the deal.
• An organized and easy to navigate borrower's package.
• Security documents to collateralize the loan against real, tangible property.

I loaned $60K to some “friends from church” for a flip they were doing about 8 years ago. I got a lien on the house they were flipping, all looked good on paper, then I found out they were using my $60K to improve their personal house! I got my money back plus 10% but I’ll never loan money to anyone again.

[Jonathan Chan]

Quote from @Kristi K.:

Quote from @Jonathan Chan:

If you're interested in adding real estate lends as another tool in your toolbox, these are the steps I've learned you should take to vet your borrower before looking at any of their opportunities!

• Background check
• Credit check
• Past performance. Look at purchase HUDS, statement of work if it was a renovation and the sale HUD to make sure they made money on the deal.
• An organized and easy to navigate borrower's package.
• Security documents to collateralize the loan against real, tangible property.

I loaned $60K to some “friends from church” for a flip they were doing about 8 years ago. I got a lien on the house they were flipping, all looked good on paper, then I found out they were using my $60K to improve their personal house! I got my money back plus 10% but I’ll never loan money to anyone again.

 You got your money plus return back. Where did they get the funds to repay you?

[Jeff S.]

Wow. You were not only lucky to get your money back, @Kristi K., but also fortunate that your borrower didn’t contest your business-purpose loan as being for a consumer purpose. Verifying the use of the money and confirming in writing that it’s for a business purpose are integral parts of any private loan. This could have cost you your interest at a minimum and perhaps a fortune to defend. It’s doubtful you would have been able to foreclose if the loan had been contested and you lost.

According to all the lending attorneys I know, this is the most popular lawsuit in private lending. Some attorneys now specialize in these. It’s so serious that, beginning January 1st in California, any lender who knowingly originates a consumer-purpose loan misrepresented as a business-purpose loan can face criminal charges and jail time. It has been a civil issue only—until now.  Protect yourself.

Our loan documentation package includes several handwritten forms that the borrower must complete at various points during escrow to establish the intended use of the funds. Some lending attorneys now recommend interviewing your borrower in a recorded Zoom call, using scripted questions, to document their intentions.

Your list and communication clause comments, @Jonathan Chan, appear to reflect a do-it-yourself approach. Well-intended, no doubt, but you might consider running some of these ideas past a good lending attorney. My opinion and also writing what I know others are thinking.

[Kristi K.]

Quote from @Jeff S.:

Wow. You were not only lucky to get your money back, @Kristi K., but also fortunate that your borrower didn’t contest your business-purpose loan as being for a consumer purpose. Verifying the use of the money and confirming in writing that it’s for a business purpose are integral parts of any private loan. This could have cost you your interest at a minimum and perhaps a fortune to defend. It’s doubtful you would have been able to foreclose if the loan had been contested and you lost.

According to all the lending attorneys I know, this is the most popular lawsuit in private lending. Some attorneys now specialize in these. It’s so serious that, beginning January 1st in California, any lender who knowingly originates a consumer-purpose loan misrepresented as a business-purpose loan can face criminal charges and jail time. It has been a civil issue only—until now.  Protect yourself.

Our loan documentation package includes several handwritten forms that the borrower must complete at various points during escrow to establish the intended use of the funds. Some lending attorneys now recommend interviewing your borrower in a recorded Zoom call, using scripted questions, to document their intentions.

Your list and communication clause comments, @Jonathan Chan, appear to reflect a do-it-yourself approach. Well-intended, no doubt, but you might consider running some of these ideas past a good lending attorney. My opinion and also writing what I know others are thinking.

Not sure what you mean Jeff. Our lawyer wrote up the loan doc, they borrowed $60,000 to renovate 123 main st, I got first position lien on 123 main st, they paid $500/month interest and the $60,000 lump sum back after 12 months. The paperwork was legitimate, what they used the money for was not.  

[Jay Hinrichs]

Quote from @Jeff S.:

Wow. You were not only lucky to get your money back, @Kristi K., but also fortunate that your borrower didn’t contest your business-purpose loan as being for a consumer purpose. Verifying the use of the money and confirming in writing that it’s for a business purpose are integral parts of any private loan. This could have cost you your interest at a minimum and perhaps a fortune to defend. It’s doubtful you would have been able to foreclose if the loan had been contested and you lost.

According to all the lending attorneys I know, this is the most popular lawsuit in private lending. Some attorneys now specialize in these. It’s so serious that, beginning January 1st in California, any lender who knowingly originates a consumer-purpose loan misrepresented as a business-purpose loan can face criminal charges and jail time. It has been a civil issue only—until now.  Protect yourself.

Our loan documentation package includes several handwritten forms that the borrower must complete at various points during escrow to establish the intended use of the funds. Some lending attorneys now recommend interviewing your borrower in a recorded Zoom call, using scripted questions, to document their intentions.

Your list and communication clause comments, @Jonathan Chan, appear to reflect a do-it-yourself approach. Well-intended, no doubt, but you might consider running some of these ideas past a good lending attorney. My opinion and also writing what I know others are thinking.

To add to the list for Mom and Pop lender.. 
1. Always meet your borrower in person  do not do these deals over e mail and internet.
2. Always visit the collateral yourself.
3. draws are done after you personally visit the property to confirm work has been done and if you dont know anything about construction bring someone who does.

This is for mom and pop one of lenders this may not be possible for those doing lending at any scale.. Myself I do about 100 deals a year for folks I have met every one of my borrowers personally save maybe 3 . And I visit my markets were I work every quarter and walk every loan.. I was just in Cleveland last week and my client there has 18 projects going I personally walked each one and spent 2 fulls days with him and his staff..

I dont think the communication clause would stand up its to hard to prove.

[James Wise]

If you're gonna lend you need to be 1st position lien. Don't do it if you aren't. Ya'll remember what happened in Cleveland with all of the private lenders who loaned money to the "cash flow king" Matt Motil?

Matt Motil Cleveland Private Money

SEC Charges "Cash Flow King" Podcast Host Matthew Motil with $11 Million Ponzi Scheme

[Jay Hinrichs]

Quote from @James Wise:

If you're gonna lend you need to be 1st position lien. Don't do it if you aren't. Ya'll remember what happened in Cleveland with all of the private lenders who loaned money to the "cash flow king" Matt Motil?

Matt Motil Cleveland Private Money

SEC Charges "Cash Flow King" Podcast Host Matthew Motil with $11 Million Ponzi Scheme

surprised Prisco does not show up either.