To Lend or Not to Lend

[Kala Samuel]

I have been presented with the opportunity to Lend to an investor on a property she owns free and clear.

"I am looking for a short term 90 day or less loan secured by the property for rehab costs of $15,000 @ 20% flat fee interest on a property I own free and clear. My goal is to finish the work in 30 days or less and then list it and sell it. We will do a promissory note with personal guarantee and a mortgage note lien to secure the funds you the house.

Purchased $190k

Repairs $25k

(I’ve put $10k of my own money in repairs already)

Selling for $279k"

what do i need to consider? Any tips?

[Jeff S.]

Urgency is often one of the first signs of a scam, @Kala Samuel. I know it’s easy to be cavalier over $15k, but why would you conduct business with a stranger for a property you haven’t seen?  How did you meet this person?

Don’t be blinded by the percent return. You will be taking your profit to the bank in dollars, and it won't be much. Note that a 20% return over 90 days is an 80% annualized rate. You didn’t provide the state in which the property is located, but unless there is an exemption, this loan would almost certainly be deemed usurious.

How are you verifying this person’s background? Though I agree with @Rick Pozos about obtaining title insurance, the title company will not completely vet your borrower or the property. This is on you.

I’m always leery here when an inexperienced lender accepts loan documents from their borrower. Who will review them to ensure they're enforceable? Who will handle the mortgage recording?

How did you confirm the $25k construction budget and why did she blow it in the first place? What if more is needed? How did you confirm the construction schedule?

Like any other real estate loan, ensure you are listed as the mortgagee on her fire and liability insurance policy.

Get a document indicating she intends to sell this property as part of her business. Verify that she or a family member will not be moving in, and clarify the use of the funds in writing. Your money should be wired to her business account if she has one.

Last, with her approval of the invoices, you should pay the contractor. Not her.