Managing Risks in Fix-and-Flip Projects: Insights from a Private Money Lender

[Michael Lindsay]

Hello BiggerPockets Community,

As a private money lender, I've seen the transformative power of fix-and-flip projects. However, like any investment, they come with their own set of risks. I’d love to start a discussion on Risk Management in Fix-and-Flip Projects and share some insights from my perspective as a lender.

Having clear and detailed loan agreements protects both parties. Terms should include interest rates, repayment schedules, and contingencies for unexpected issues. What key clauses do you include in your agreements to mitigate risk?

[Will Barnard]

In my opinion, most risk management comes from proper deal analysis and not specifically what is in the loan docs. For true private money lenders (not hard money), both parties naturally need to be protected but more so the lender since their money is at risk. This is why I personally deliver and execute a personal guarantee rider on all my private investor loan money borrowed. Some investors think I am crazy doing that and perhaps so, but I take other people's money seriously and even when the crap hits the fan (and it will if you do enough deals for a long enough period of time), paying back your lender is priority one in my book.

Most of my deals for private money also include a balloon payment rather than monthly payments. This is never accomplished in hard money loans and some may feel this adds more risk to the lender not having interest paid as you go, I argue that not having to come up with that monthly interest payment reduces the amount of capital needed for that project total and there by reduces the loan to value needed which helps both parties. Lets face it, the real risk is the principle anyways so protecting that is most important.

I also have no early payment penalties and often, the ability for the investor to roll into the next deal allowing their capital to be constantly working for them.

All loan docs should include the interest rates, loan terms, and payment schedules. 

A lot of rehabbers get in trouble when they go over on budget or over on time. So having safeguards in your loan docs or safeguards/plans outside of loan docs is essential so both parties know what the plan is if and when such occurrences take place.