Lending money against real estate is a fantastic way to earn passive returns but it comes with a lot of risks.
I’ve laid out guidelines you should follow and not stray from until you are experienced enough to understand the risks your taking.
As always, this isn’t legal advice. I highly recommend consulting with your attorney.
Private Lending Rules that you should abide by:
- Do not lend money that is unsecured.
- Have an attorney review the documents and ask for their guidance.
- Loans should be secured in first position against the property with a Deed of Trust which should be recorded before the release of funds from the attorney’s escrow account to the borrower/seller.
- Never wire funds directly to the borrower. All documents and transferring of funds should take place with a licensed real estate attorney in the appropriate state.
- You should request a list of all transactions the borrower has been a part of and a Personal Financial Statement. You can even ask for a background check and credit report.
- Request the borrower to sign an unlimited personal guarantee.
- Have your own real estate attorney review the loan docs before signing or sending money, no exceptions.
- Use a non-biased 3rd party to check the deal structure, the borrower, and the property itself.
- Get Lenders Titles Insurance
- Ensure you’re listed as Loss/Mortgagee on the insurance or builders risk policy with appropriate coverage.
- Only lend to an entity, not an individual. You should avoid lending to primary residences.
- Ensure there is a minimum of 30% equity.
There are more steps you can and should take during due diligence like checking references, confirming there are deeds of trust on their other properties, asking for bank statements, etc. but this is the core of what you need to do on all private loans.
These guidelines are to protect you the lender. The borrower may have other options that don’t require some of these. That’s great for them. It is safer to pass on riskier opportunities until you understand the risks and borrower.
If you’re unsure or would like another set of eyes on an opportunity, you’re welcome to reach out to us.
