3 Common Pitfalls to Avoid When Working with Private Lenders

by | BiggerPockets.com

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.



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!

About Author

Matt Faircloth

Matt Faircloth, Co-founder & President of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, is a developer and owner of commercial and residential property with a mission to “transform lives through real estate." Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to owning and managing over 370 units of residential and commercial assets throughout the east coast. DeRosa has completed over $30 million in real estate transactions involving private capital including fix and flips, single family home rentals, mixed use buildings, apartment buildings, office buildings, and tax lien investments. Matt Faircloth is the author of Raising Private Capital, has been featured on the BiggerPockets Podcast, and regularly contributes to BiggerPockets’s Facebook Live sessions and educational webinars.

3 Comments

  1. Cindy Larsen

    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

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