Mortgages & Creative Financing

3 Common Pitfalls to Avoid When Working with Private Lenders

Expertise: Real Estate Investing Basics, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Personal Development, Flipping Houses, Commercial Real Estate
161 Articles Written

As many of you would I'm sure agree, private loans can be an amazing vehicle for both the deal provider (you as the investor) and the cash providers (your private money partners). Private loans can help you finance flips and rentals and expand your real estate investments. Private loans are great for lenders as well. They can be a terrific way for them to receive a high ROI on the money. But private loans (like all tools in real estate investing) should be used with caution and intelligence. There are pitfalls, common mistakes, and things to avoid when it comes to using private loans.

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Related: How to Build a Million-Dollar Network of Private Money Investors

In today’s video, I share three of the most common pitfalls to avoid with private loans. These include:

  1. Lack of documentation
  2. Miscalculations
  3. Holding the bag

The key is create win-win arrangements and do whatever it takes to protect your private lender's money. I would love to hear from you as well.

What pitfalls have you experienced—either as a cash provider (private lender) or deal provider (you the investor)?

Let’s get some discussion going!

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, i...
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    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied almost 2 years ago
    Matt, Interesting video. I have not raised private capital before, so I don’t really have any input, except that I was hopeing to hear about the pitfalls that private lenders should be looking out for. Obviously, as a private lender all of the pitfalls you that you outlined above apply, because the same sutuations could be bad for the private lender: not just the borrower. I would translate those problems, from the privale lender POV as 1. Don’t loan money without a mortgage 2. Make sure you understand the numbers from the standpoint of the person you are lending the money to, so they don’t experience a shortfall that puts you in the poistion of having to forclose (I read somewhere that the cost to forclose, using a service, is about 25% of the outstanding loan amount: if true, that could be BAD) 3. Make sure you understand all of the detail of the calculations used to underwrite the deal, including the assumptions that went into those calculations. Other pitfalls that I would look out for as a private lender (Off the top of my head) are: A. Borrower does not have good personal financials B. Borrower does not have documented experience doing similar deals successfully C. Borrower does not have references from other private lenders. D. You are not in 1st lien position (higher risk) E. The mortgage loan documentation is not written to protect you (the lender) well enough. I am interested in becoming a private lender, but have not yet spent the time to educate myself to be able to successfully underwrite deals as a private lender. What I really want is to read “The Book on Lending Private Capital for Real Estate Investments” I just made up that title. Do you have any additional pitfalls I should research? Do you have any pointers on sources of information I could use to begin educating myself as a private lender? Thanks, Cindy
    Yasuha J. Dorce Realtor from Miami, FL
    Replied almost 2 years ago
    Great video, really sure have seen this a month ago. Before I over shot the ARV. SMH.
    Jenny Stecklair
    Replied almost 2 years ago
    What @Cindy Larsen asked! I am in the same boat, trying to see if Private Lending is right for me. It seems like there is not a lot of information out there about being the lender. Either way, this video was a big help! Thanks Matt!