Risk involved with private lending with first lien

4 Replies

Hi,I was just trying to know what may be risks(hidden) involved with private lending on first lien.

I hope there must be many experienced investors and lenders here...if you guys wants to share your experience..

Thanks 

Hi @Raj G. I see at least three major risks with private lending on a first lien. In no particular order:

  • You might not have a first lien after all - At the closing, is your borrower obtaining a lender's title insurance policy from a reputable agent? If not, you may discover too late that what you thought was an unencumbered property already had a lien on it, making your "first lien" really just a second, or worse. Solution: Only close with an experienced closing attorney and always make the borrower get the lender's title insurance.
  • Your collateral (the property) may be worth less than you think - OK, let's assume you definitely are in first position. You lend $90K on a property worth $100K. Or is it? Did you get an independent appraisal, or did you just take the word of the borrower? Solution: Unless you are intimately familiar with the local market, demand third-party verification of the value of the property, ideally via an appraisal.
  • In the event of a default, getting the property back might be a huge hassle - If your borrower does stop paying you, you're going to have to foreclose to get the property. Depending on which state the property is in, that could be a two-month or a two-year endeavor. States like New York (and maybe New Jersey) are much harder to foreclose in than, say, Texas or Georgia. Solution: Know what it will cost in time and money to foreclose and factor that into your ROI calculations.

Hi @Mitch Messer , Thanks for your reply, Just wondering if you could please advise also like in today's market where house prices are all time high/top, is it worth to buy and rent or wait and watch...Thanks

Hi @Raj G. Before you assume your market has peaked, look at the actual data. There is no national real estate market; every area is different. So, ignore all the anecdotal evidence and instead look at the hard facts (e.g., sales prices adjusted for inflation) before you draw your conclusions.