How does one actually become a private lender?

Question

I know most people who get into private lending usually start by lending to friends or family or someone in their trusted network. Is it really as simple as that? Just draw up a promissory note, register it with county so you have a legitimate lean secured on the property?

How did you get started?

What is your process like to vet your borrowers and their projects?

Do you finance 100% of purchase price? 2nd mortgage or PMM?

I'm really interested in what others have to say. I've gotten so burned out trying to buy properties in this market and it's painful. For the first time ever I find I have more money available than I have projects to put that money to good use. Private lending seems like a great solution. My experience is that private funds are always in demand, why not capitalize?

Of course, the biggest factor for the lender is risk! How do you mitigate that? What metrics do you use? Any hard and fast rules for what you want to see?

Theodore Rivera · Answer

@Jeremy D. I would suggest you start with discovering what the rules and regulations are for your state. Every state is different not only as far as what is required to be a lender, who you can lend to, how you can lend to them, how much you can charge to lend to them etc.

Then there is the other side of the equation, you've already loaned them the money and the deal goes sideways. Your borrower fails to pay on his note, and you have to foreclose. Oops! What are the foreclosure laws in your state? Judicial or non-judicial? How long is the process? 3 months or 3 years? Lending isn't difficult as long as you do the due diligence, and have the right people on your team.

Here is a few quick tips. As @Kathie Riedel mention get the proper legal documents more importantly drafted by a real estate attorney, a lender's attorney. As @Rick Pozos mentioned, always close at a title company or attorney's office depending on your state. Vet your borrower, for experience, reliability, integrity. Vet the deal itself. Does the deal make sense? Would you do the deal if you were in the borrowers shoes? Do the numbers spell out profit? If the answer to these last questions is no, then kindly let the borrower know. Lenders serve as a second set of eyes to borrowers, especially to those who may lack some experience. The borrower's success is the lender's success.

Rick Pozos · Answer

It all depends on you. I have lent on 1sts, 2nds and just personal loans. If you are going to do anything having to do with real estate, make sure with the title company that you have a proper and enforceable LIEN on the property.

You have to think about whether you would take on the project if you were in their shoes. Plus, how well do you know your borrowers. I would want to know them pretty good and know their integrity. Because if something goes wrong do you think they will walk or will they do what they need to in order to make you whole again??

Lastly, make sure that the borrower knows what they hell he is doing.

Kathie Riedel · Answer

@Jeremy D. I think you have a good idea. The first step is to decide how you need to "store" the money. If you may need immediate access to cash you don't want to lend. If you feel like you will need money at a slower pace consider lending.

This is a very high level suggestion and if you start down the path you will get into the details. You will need clients (borrowers), the proper legal forms and documents, and knowledge. The best way to find clients is to network at every opportunity. The best way to get both forms and knowledge is to work with an attorney. I am assuming you already have the  additional knowledge about local  property values.

To answer your specific questions.

I got started by telling friends and family of my new found strategy.

To vet potential clients I pay for a background check. I do not charge to do this but charge an additional point for a first time client. If they fail the background I eat the cost.

I only do first position loans. Details regarding how much of the purchase price I will finance depend on the deal. I will go as high as 100%.

Good luck. Feel free to contact if you have further questions.