Private Lending, Trust and Risk Tolerance

In real estate investing, two of the most important things you need, whether you are the private lender or the borrower, is a promissory note and a trust deed on a property indicating there is a lien.  In other words, there is collateral (real estate) for the loan.

As the real estate professional (borrower), you are securing your lender’s money to the property in the event something goes wrong, your lender will get his or her money back when the sale of the property takes place.  If there is no property to secure the money to, obviously the loan is unsecured.  Your lender is taking a chance and hoping you’re not going to run with his money.  Hopefully, you’ve developed enough trust to be able to do that.

As the private lender, it’s just as I said, you’re taking a chance if the money is not secured to the property.  Before lending money, you need to determine what your risk level is in terms of amount of money and amount of time the money is out of your pocket.  Scenario 1: If a buddy of yours asks to borrow $5, because he was short that day and says he’ll pay you back in 30 mins when he goes to the bank and withdraws from the ATM, more than likely you would spot him or her….no problem (I’m assuming).  Scenario 2: A friend who needs $5000 earnest money to secure a property because it’s a great deal, but does not have it at the moment, but will have it in about a month or two because funds from a hard money lender will be used to purchase the property, and your $5000 will be returned along with an additional 6% ($5300)….that’s a little more to risk, especially if there is only a promissory note, but no trust deed showing you as a lien holder.

if you are a private lender and your risk level cannot handle the latter scenario, you shouldn’t be investing your money.  As a real estate professional or borrower, you should not be accepting any money from someone who has a low risk tolerance.  You really need to qualify your client to determine that.

If you do take money, you better make sure you can pay that person back.  Make sure they feel secure enough with a Promissory Note and have it notarized.  Oh…and have a good attorney.  Run the contract over to your attorney to make sure all is good.

***Always check with your financial advisers before making an investment***

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~ by Llew Quinol on September 23, 2015.

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