How to market private lending to out of state areas?

Question

I would like to start private lending to out of state areas, where properties are within my LTV % for first position. What is a good processing in reaching reputable real estate flippers/buyers to do so?

Thanks!

Rebecca Knox · Answer

My advice is be cautious of the private messages you will more than likely receive off this post :)

Tuan Tran · Answer

Yup, pretty much what I've concluded concerning my financials...  Thanks

Jeff S. · Answer

“How would you further protect yourself when not in the primary position?”

You can cross-collateralize your loan, @Tuan Tran.  Here, you lien one or more additional properties in addition to the one you’re lending against.  The problem is all your liens could be in second position. Plus, some first position lenders don’t allow seconds.  Additionally, whether or not it’s worth the paper it’s printed on, always get a personal guarantee if you are lending to an entity.  These are weak protections, in my view.

My better answer is much more straightforward: keep your life simple and NEVER lend in second position.

I know several lenders who seem to always lend behind our first position loans.  These lenders specialize in subordinate loans.  They understand the risks and have the wherewithal to buy out a first position lender, make payments, or otherwise protect themselves during a foreclosure.

If you run the risk of getting wiped out without being able to protect yourself, Tuan, you are undercapitalized and shouldn’t be doing this.

Tuan Tran · Answer

I'm really glad you brought this point up.  I do go to my local real estate clubs.  One organizer in particular asked me to look into their ventures but I can only be the second lien position.  I'm not very confident with this position.  I'm confident with their ability to do the work as they've showcased many of their transactions.  The worst case scenario is that we hit a recession that lasts longer than the term of the note.  I have no control on how the secured property will be dealt with.  It starts with the flippers and then the primary position.  I could very well lose all my money being in the second or deal with extra litigation fees that I can't really price now.  At least, if I was in the primary position, I would have a property to fall back on.  How would you further protect yourself when not in the primary position?

Jeff S. · Answer

This is a seriously bad idea, @Tuan Tran.  It’s not the LTV that protects you from a bad borrower.  A low LTV only makes it easier to recover your assets in a foreclosure or other troubles.

What protects you is lending to others with integrity who know what they are doing.  This means lending to those with experience and with whom you’ve developed a relationship. It can only really happen if you lend locally, meet your borrowers, and look at their deals.  Local real estate clubs are your best resource for finding potential borrowers.

Alternately, fractionalized loans are legal in CA and there are many brokers who arrange these.  They allow you to participate with relatively small amounts of money, lending alongside others using first position loans to local rehabbers.  Here too, you’ll get to meet them and see their properties.

The bottom line, Tuan, is that if you don’t have enough money to lend locally, you don’t have enough money to lend safely.

Be careful, and best of luck to you.

Jeff Cichocki · Answer

@Tuan Tran,

Lending in other states can carry a higher risk for you if you're not working with the right people. I would strongly recommend that you find local boots on the ground to work through. Just networking alone will not find you the best borrowers. All borrowers and all of their projects are a great risk in their eyes.

One of the questions I like to ask is this...

How many investors in the room tonight have gone out and found a great deal, got it under contract and then went home to tell their significant other... Man! I can't wait to lost my backside on this!

No one will ever say this. When you are lending to strangers in other parts of the country who you have no real relationship, how will you manage the funding of the project? How will you properly control the draws? Inspections? Relationship? How will you properly vet your borrower? There's a lot more to lending than just finding a warm body and a deal.

Call around to some other HML's across the country and ask them what their foreclosure rate it. I promise you it's pretty high. Our's is 5 properties in 10 years. I would suggest you find someone to work with who will work with the borrower to make sure they succeed. There is way more profit in not foreclosing than there is foreclosing. The lifetime value of a borrower i significant if you can help them succeed. Plus, it's way cheaper to market and help the same borrower repeatedly than it is to constantly have to find new people.

You should make sure that the people you work with will provide you with the same thing but as safely as possible. Unfortunately, there are a lot of empty promises here on BP.

Good luck and be safe with your money.

Jerel Ehlert · Answer

Networking in person at local clubs, either you or your proxy.  If you are unable to develop your own network of borrowers and vendors in these new markets, you are better off working with local lenders you can trust and buying or funding their loans.

How to market private lending to out of state areas?

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