Private Money Lending Top Mistakes
- Never buy a note on something you wouldn’t want to own. Consider the worse case scenario where if your borrower defaults you take it over. You might need to have a team there or some contacts local that you trust.
- If the loan goes into default, take action immediately start the timeline just like an eviction.
- Do not loan money to someone you would feel uncomfortable foreclosing on such as a friend or relative.
- If you are lending money on repairs you might want to originate a separate note with a higher interest rate with separate collateral as to not encumber the original asset with debt that you put you in a lower leverage position if you ever have to collect.
- Beware of borrower robbing Paul to pay Peter. Collect monthly installments so you know if the borrower is getting into financial trouble.
- If you don't know what you should get in terms of interest rate or don't know how to evaluate the risk get a mentor or hire a 3rd party professional who will give you their opinion of the deal. Don't do a sucker deal even if they are offering you 12-15%+.
- Get lender's title insurance for the loan. The purpose of title insurance is to shift risk away from you to the title company when creating a real estate note.
- Verify that there is property insurance on the deal and that you are named as an additional insured. Even though it's a remote chance of any issues it costs very little to have you covered. Plus you as the lender often has more to lose than the flipper.
- Insist that the borrower provide you with evidence of payment when property taxes, insurance, and homeowner’s association fees become due and are paid, or when possible have your loan servicer set up escrow service to pre-collect the required funds.
- Get a personal guarantee if you are lending to an entity or to an individual with some weakness. Or, have the borrower execute a Deed in Lieu (DIL) of foreclosure and send it to you or your custodian. Should the borrower default, you can record the DIL to save the expense and time of foreclosure.
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