All Forum Posts by: Beth Johnson

When talking with new and aspiring private money lenders, I always recommend getting added as an insured on the borrower's property hazard insurance policy (known as an insurance binder). I had a new PML ask me about the difference between a Loss Payee and a Mortgagee so I thought I would share some commentary from my insurance agent partner on the subject: 

Quick point of reference between the difference between Loss Payee and Mortgagee:

Mortgagee: the Lending company/entity that lends the money for the property

Loss Payee: an entity or party that has an insurable interest of said property.

By default, the Mortgagee is both the one that lends and the one that has an insurable interest and therefor both descriptions pertain to “Mortgagee”.

Which is preferred: Traditional Banks always only require they be listed as the Mortgagee whereas Hard Money and or Private Money; it’s 50/50.Now, you’re probably wondering in what instance would someone be listed as a Loss Payee but not Mortgagee- well, let’s say someone lends the property owner money in a non-traditional fashion - we can chat more about this later -whether it be for the property or for something else, doesn’t matter, and the borrower uses the property as collateral. The person who lends the money can require that they be listed as a Loss Payee. They aren’t the mortgagee, but they do have an insurable interest on the property. If it were me: I’d ask to be listed as both. No harm, no foul in requiring/requesting it. The Insurance companies for many renovation policies don’t usually have an issue with listing the lender as both the loss payee and mortgagee.

Check out North American Savings and Bank. SDIRA non-recourse loans used to be their specialty but I am unsure how much they still do as it's been a while since I've connected with them. I will say that LTV requirements and even strict qualifications for asset type, condition, age, etc. make it super tough unless the property LTV is below 50%.

I'm a private money lender and a buy and hold investor, and in my opinion, no lender will ask for an upfront fee other than possibly asking you to pay for an appraisal or BPO directly to the valuation company. The only known situations where I was ever required to pay a loan fee upfront before funding is with my commercial lenders (banks, credit unions, etc.) on our 5+ units. So, it's most likely a scam.

Just be careful lending to someone's primary residence. There are often homestead exemptions and other regulatory issues that could cause issues with your loan, even if it were business purpose. I'm in WA state and we used to do some of those but don't now that the homestead exemption increased substantially, making it difficult to recover funds if the loan stopped performing. 

Consider private money lending and/or note investing for a passive income source? You're in good company. It's a lucrative alternative investment if done right, offering strong interest returns without the headaches of managing properties.

But it's not without its risks. I've seen a lot of deals being presented lately where would-be individual private money lenders are potentially placing themselves and their capital at risk.

Here are key pitfalls to avoid:

🛑 Over-reliance on relationships

Knowing someone personally doesn't mean you know their financial stability. Fine, you've known each other since you were 6 yrs old, but can you tell me what their credit score is, their debt-to-income ratio, or net worth is (and not what you THINK they have as assets). Without clear terms in promissory notes with punitive measures to set standards for performance, and security against the subject property, there's little incentive for timely repayment.

🛑 Insufficient property equity

Lending without enough equity in the secured property as-is can leave you unable to recoup your investment in case of default. Don't just focus on the after-repair value (ARV) - that's pure speculation until the project is actually completed and sold.

🛑 Unrealistic ROI

Beware of deals promising excessively high returns without proper collateral or penalties. Savvy investors seek cheaper capital elsewhere if the project's potential is truly strong so why would they really want to promise you 12% interest and 10 points on the back end when the project is completed? If the deal and the investor is so great then they should absolutely be capable of getting cheaper debt elsewhere. Question why they came to you in the first place with such a big promise of returns.

🛑 Blind trust in others' opinions

While guidance is valuable, ultimate responsibility lies with you. Don't defer decision-making to others without thorough understanding and legal review. And stop reading proformas or prospectuses and taking it at face value. It's your responsibility to vet out the numbers yourself, stress test it, and ensure the numbers are accurate, realistic, and inclusive of all costs associated with the project.

🛑 Lack of due diligence: Seek multiple opinions and legal reviews to fully understand the investment, your legal protections, and how to safeguard your capital. Build a network of experienced professionals to provide insights and perspectives relative to property valuations, project scope and budgeting, title and escrow, private lender laws and regulations, loan servicing, document collection and review. Private money lending is a team sport!

In short, approach private money lending and note investing with caution, thorough research, and a network of trusted advisors.

Your money, your responsibility.

@Ryan Fox I have been a PML for nearly 10 years and, in the beginning, I wasn't strict about getting an insurance binder in place BEFORE funding nor making sure my borrowers had the right coverage. I got so lucky back then (3 properties have since gone up in smoke and we were fortunate to have been added as a loss payee/mortgagee before funding so that we were able to receive claim money) and was finally able to get my ducks in a row with the help of a local insurance agent who'd help me establish the right coverage limitations for my market, the project and property type, etc. She would also review some existing policies for me when I was doing refinances or 2nd lien positions on existing rentals, and when my borrower didn't have a recommendation for an agent, I would refer them to her. Win-Win-Win situation in that case! 

I would say it depends on your market median home prices and other considerations. My agent recommended 1M in general liability because the home prices in greater Seattle are 700K+. If you are lending in amounts less than 100K then that might be overkill. But I would make sure you cover the replacement cost value (RCV) and not the actual cost value (ACV) which is typically less coverage. Lots of information about insurance coverage for lenders within the book I co-authored - Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending published by BiggerPockets.

If you are willing to show strong cash position with the sale of that portfolio and put more money down, if needed, then I don't think it'd matter much to private money or hard money lenders. Commercial lenders will like the strong cash reserves and conventional would likely underwrite easier anyways than having to provide and prove out your rental income on a portfolio. 

Do they have other rental properties as collateral that you could use? The way the market is right now with higher cost of capital is local banks and credit unions are much more likely to be monitoring loans that fall out of compliance and calling them due. I'm hearing about it more and more these days. Less likely that a larger bank would take notice even if they have a provision prohibiting junior liens, as many of them do. You could consider getting a deed of trust signed and not recording it. I don't love that concept but it's better than a completely unsecured note. 

@Jay Hinrichs - you made me LOL. Do you need the funds to come from zero interest credit cards in order to apply for coaching? :)

For the OP, we don't lend on subto because we don't want to go in 2nd behind a loan that wouldn't be in the borrower's name in the case of a wrap. And we won't do novations because there are heightened risks for a creditor, there, too since the borrower/investor would actually not be on title - they would have legal authority over the property but if for some reason the seller decided to sue and claim they didn't know how those transactions work, our capital could be at risk. For seller financed deals, we don't want to do it unless the borrower is putting up other collateral to cross it with and/or the seller would be willing to go into 2nd position. Sometimes we will do 2nd position behind the seller note as long as it's long term, with low interest/default interest, etc.  

Check out Lend to Live: Earn Hassle-Free Passive Income in Real Estate published by BiggerPockets. It's the how-to guide with lots of meat on how to find and fund private money loans for passive income. 

A few things to know about California -

1) you need to be licensed to lend in this state. You do not need to be licensed to lend in other states as a CA resident, in most cases. But consult an attorney steeped in private money law.

2) this state is HIGHLY regulated so you need to know what you can and cannot do.

3) CA recently (2022) had case law against loans that went into default, were worked out with the lender and then default interest was discharged (subject to usury rates) because the loan modification wasn't worked out through the real estate broker who originally supported to loan origination.

Bottom line, make sure you explore your legal rights and considerations before lending in this state. Geraci Law is in your backyard as a private money lender law firm. They put out a ton of good educational content and there are quite a few articles around recent legislation making private lending in CA more tenuous both on the origination side as well as on the servicing/foreclosure side. Good luck! Feel free to reach out if you have additional questions. I'm one of the authors of the book mentioned above!