All Forum Posts by: Beth Johnson

As others mentioned, there is a ton of risk in doing unsecured loans. Even with a personal guaranty, you have to go after them judicially and it's not worth it if the borrower has very little to their net worth outside their primary residence which many states have homestead protections against. You also subject yourself to possible discharge of loan if the borrower files a bankruptcy. Secured debt can offer some better protection in this event of a BK compared to unsecured debt. 

To really understand all the critical considerations about the borrower you should review prior to funding, I suggest you check out my book Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending published by BiggerPockets.com. It'll cover all the foundational information you need to know and weigh before placing your hard earned capital into the hands of another person - even if you know them personally. I would gut check personal relationships even harder than strangers. How often does family and friends disclose their tax/income to you, their credit scores, their performance reviews, etc. Treat them as you would a prospective tenant and really gauge their credit worthiness before getting into bed with people you know and love. Just my two cents as I've seen lots of people get burned by those around them they thought they knew and trusted implicitly. Including myself as I'm about to foreclose on someone who used to work for me and I viewed like a surrogate son to me. Never again. 

Private money lending also requires certain licensing requirements for 1-4 units in addition to fractionalization and participations being deemed a security. You could reach out to Kevin Kim at Geraci LLP in CA who's firm does securities and PML law in all states and is intimate with CA, OR, WA, and ID laws as well as corresponding state specific financial institutions governance (in WA it's called DFI or Department of Financial Institutions) and how to navigate their expectations accordingly...

Above all things, treat this transaction like a business, since that is what it should be. Use an attorney to draft up your legal loan documents and ensure it's safely secured against the property as a deed or mortgage. Make sure you are in a state that doesn't have licensing requirements for private lenders and make sure you work through a title and escrow agent so that your money is insured with a lender's title insurance policy and ABSOLUTELY make sure your LLC is listed as a loss payee on the property hazard insurance. Most flips that are vacant will require general liability and builder's risk and/or vandalism. You don't want your money to be lost if the property's value is more in the improvements and not land value. Pick up a copy of my book in the BiggerPockets bookstore to make sure you understand all the ways to do it safely and precautions you should consider. Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. www.biggerpockets.com/lendtolive.

I completely agree with what Chris and Jeff said. It's not the right time to arbitrage borrowed capital to lend out, IMHO. If you want to learn more about the practice (and art) of safely and securely finding and funding a PML to see if it's for you, check out my book on BiggerPockets called Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. 

As others have mentioned, 100K in some markets is doable but in most coastal, appreciation markets, it will not be sufficient to lend in a safe manner, i.e. with a large equity buffer to protect your principal investment. PML is for capital preservation and more predictable passive cashflow so you will want to ensure you do it properly so that your principal amount is returned to you, first and foremost. 

I have a Facebook group exclusively for private money lenders to network, share best practices, and learn. If you want to join it's called Lend2Live: A Private Lender Collaborative.

Hi Debbie - I can possibly do a second position loan against one or both of your rentals to help you cover the remaining expense so long as the property will not be owner occupied. Message me and I can give you more details. 

Just because they flipped houses doesn't mean they will do new construction well. Because this is a new strategy for them, it likely means they have fewer options for construction loans due to lack of experience. If you aren't familiar with the way construction loans work (on a draw and interest only paid on what you lend out) and aren't familiar with construction scope and timelines, I would not lend on this project. You could potentially shore up the loan by adding additional collateral (even if it's in 2nd position behind bank loans) but it's still pretty risky when you aren't knowledgeable about this type of project. Most truly individual private money lenders don't love construction for a number of reasons:

- Time horizon on these projects is too long and the project itself highly speculative

 - Most construction loans are non-dutch, meaning you pay only on what funds are released and PMLs don't like having to earmark additional funds that aren't deployed and aren't earning a monthly interest on. 

 - Handling the construction draw process (without using a third party service to facilitate) can be super cumbersome and difficult to understand to most lay PML investors. Just remember that mechanic liens can precede your loan potentially and lien release waivers and onsite inspections of work completed are super important to the release of funds. 

 - Any budget overruns could exceed the amount of capital a small PML may have and require the project to be refinanced into a new construction loan elsewhere while the project is inflight and this could pose challenges if the borrower doesn't have much skin in the game or liquidity. 

Good luck with this but make sure you dig a little deeper into the project before deciding to move forward. 

Since you didn't have anything in your contract beyond the 2 3-month extensions for a point each, i would assume it could be contested legally as far as any additional points that would be paid for the extra time beyond the first 18 months since it's not in writing. I wouldn't be super punitive on this since you continued to accept payments monthly until they wanted to pay off. If you had a default interest clause in your promissory note and didn't enforce that and they still made monthly installment payments, for which you accepted each time, then you are in a sticky situation to require additional extension costs. If you thought they were in breach of their contract due to it being past maturity, you would likely have been advised legally to stop accepting payments. I've been told by my attorney (i'm a private money lending business owner) that we do not accept payments post maturity unless we do a new written extension or loan modification with agreeable terms. NJ has licensure requirements related to private loans so make sure you consult a real estate attorney to understand your legal rights and proper course of action. 

My husband and I have a PML business and we also have employees. As others have mentioned, we can't do a Solo 401k because we have a sponsored plan for our staff as well. That said, we do lending out of our SDIRA and there are some considerations about prohibited transactions and set up (checkbook control or custodian managed, for example) etc. that should be reviewed with a custodian or SDIRA expert. Another consideration for you since you are located in VA is the licensure requirements for private money lending. There are some restrictions you should know about when lending in your home state. Make sure to connect with a real estate attorney who actually does this type of PML investing as part of their practice so you know what you can and cannot do. If you are wanting to learn more about how to protect yourself as the PML, check out the book Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending available in the BiggerPockets bookstore!

Do not use Evergreen. They are the absolute worst of the worst and could not get some of our accounts accurate and refused to make it right. Multiple time over multiple years. For example, they'd pull 4 of 5 payments for a borrower from the same account and then blamed the borrower for not checking to make sure the payment was pulled before a late fee was assessed. Since I was brokering the private money loan, I couldn't waive the late fee (which my lender still wanted) and the borrower was upset because ENS wouldn't eat the cost, which was a systems error on their part. The argument was akin to saying we needed to call county clerks to confirm escrow attorney recorded our transaction when that's what we actually pay them to do in the first place. 

On another note, you have some fairly restrictive laws regarding private lending, consumer protection (seller financing to an owner occupant) and loan servicing in CA state so make sure you are allowed to do this on your own and understand the licensure requirements to lend, broker loans, and service them as well. There is some nasty foreclosure/usury limitations being challenged in CA courts right now and the appeals are still pending. And there could be some carve out exemptions for seller financing and if so then that would possibly need to be filed with the California's DFPI.

Research local escrow companies and banks to see if any of them do contract loan servicing. It's a way better experience if you can find a local resource than these larger, national servicers. Better customer service, IMHO. But if I had to choose from your list, it'd be Note Servicing Center. They are higher touch and based in CA, which would be a benefit to you. Good luck!