The Dangers of a Private Loan
I am getting into private lending slowly but surely. I'm really a newbie. I'm discussing with a rehabber team about a loan, they're local, and I like them and am willing to meet them more than halfway to earn their business. My stock broker cautioned me against loaning on a rehab, saying that a major change in the ARV of the house could spell pain for me. I wonder what you think about how loans to qualified rehabbers locally would fail such that I find myself standing when the music stops. It seems like that it would take a certain set of variables all going bad for a rehab team with experience and (apparently) character to walk away and leave me with a house that I have to finish and sell for a 30% loss. What are some scenarios, some variables, that make PML risky (or, I guess "low risk" [vs. say a bond or buy and hold] might be the exact phrase I'm looking for).
Most Popular Reply
I've found the single most important element to your safety is for borrower to have skin in the game. The more money borrower has into the deal the less likely a default. Loan 80% of purchase (that is 20% down) until you have history then 90% of purchase price. You will sleep well at night. Experienced borrowers understand this and have no problem with it. Inexperienced borrowers will whine and totally not understand why you won't give them 100% of purhcase and 100% of rehab for their absoulutely awsome deal. I've had borrowers offer me higher and higher interst rates to get those sky high LTV's ... don't give in!