Private Lending Mistakes
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
For you "private lenders" what mistakes have you made? I'm wondering if private lenders are 1. willing to disclose mistakes and 2. what they did to correct it, if they did at all.
I just read about private lending, the lender claimed to be a private lender and not lending to non-owner occupied, leased properties, leads be to think they meant owner occupied.....then claimed to be in the business of lending. So, is there a mistake there?
Then, there was a comment about charging loan fees (or points) on a private loan, is that another mistake for a private lender?
So, what is a private lender? :)
The biggest mistake I've made is not analyzing the borrowers deal, and making sure there is enough reserves (which they resent I'm sure). I now have a spreadsheet that calculates rehabber (borrower) profit and cash they need. If borrower is not going to make a profit, I say it right up front. Saying no, by the way, was very hard for me, but I've learned. You can't imagine how many rehabbers think they have a deal but don't.
If the deal is bad for the borrower, it's a disaster for me. I know everybody thinks the lender makes a killing if borrower defaults, that's just not true. The last thing I want is to fix the borrowers mess. I want a borrower that is successful every single time so I can lend deal after deal after deal and not be involved in the rehab, at all. Unfortunately, I had to foreclose recently, I rushed around and finally found a local rehabber and sold the loan to him a few days before the scheduled trustee sale. He, I'm sure, will make a good profit, me, I'm glad to have my principal back. If I wanted to be a rehabber, I'd be a rehabber, not a lender. Driving to the rehab site every day, being sticky hot, listening to contractor bs lies, dealing with blood sucking government officials, historical societies, standing in line at HD, owner liability ... need I say more.
This is a great thread by the way, BP tends to focus on the greedy lender, but there are two sides to that story.
Another thing I've noticed: Everybody should be concerned about costs, if you aren't your not a good business person, plain and simple. On the other side of that same coin is the person that is overly concerned about fees and loan amount. When a potential borrower starts drilling down on fees and wants 100% of the purchase price and 100% of the rehab costs, and simply doesn't understand why that doesn't work for the lender, I just want to run ... that to me is a clear sign of a beginner. I have never had a successful rehabber drill down on the stuff, never.
Being on the lender side of the rei fence, the difference between a beginner and experience is as big as barn door. I smacks you up side the head in the first few minutes of the conversation.
Yes Dawn, I have had issues with BP members and people who have seen my posts on BP. There is nothing that ensures that all BP members are honest investors. There is every reason to think that scammers would use boards like BP to troll for victims.
While I agree with this totally, there are some exceptions. Case in point, many, many lenders have used my loan docs for their private loan investments with me, however, these docs were drafted by my attorney, edited by my broker and have been used over and over again. However, I would add that I always inform lenders to have their counsel review the docs and make any changes they deem necessary. This allows new lenders and even those who have been lenders but do not have their own docs, the ability to invest without spending the money to have the docs created, rather, a small fee to have my existing docs reviewed.
Will, I'm thinking you have docs on file with lenders with you as the borrower, that's okay, not really what I was saying. If another lender obtains docs from another lender that's okay too, they can also assign an entire loan file with your consent, with you being the borrower.
The point about verifications, (not your financial statements) lender's should never allow a borrower to touch them between the lender and parties to verify anything.
If you give a borrower a VOD (deposit) to go have filled out, they could fill it out and return it later.
You need to ensure that in the audit trail verifications of employment, assets, liabilities, other loans, rental agreements, mortgage history, tax returns (from the IRS, not returns provided) and such matters where information obtained is a basis to justify making the loan, are all sent out and received without the borrower having access to these verifications.
You can obtain information directly from trusted sources, but don't allow any borrower to intercept such information as it is then tainted. :)
The Investment Calculator right here on BP will calculate fix and flip profit for you.
The spreadsheet I have isn't really ready for prime time and isn't much different than the BP calculator anyway.
Yes Bill, that is what I meant and yes, we are in agreement.
Biggest mistakes:
Not foreclosing fast enough
Relying too much on "reputation"
Yes, I lent money to someone in the BP community with stature & got burned.
Great lesson.
@Ellis San Jose please let me know in an email or PM who that was, I want to avoid getting burned too.
I think this thread is a perfect example of why lenders need to do due diligence on their borrowers and vice versa. Just because someone is a BP member doesn't guarantee that they are going to come through for you. While I wish that was the case, on a community of our size, it is just impossible for that to be true.
Always do your homework - even when dealing with folks here on the community - and hopefully doing so will help you avoid problems.
Sorry to hear that some of you have had some bad run-ins . . . I'm glad to know that you guys have all had positive experiences here as well or you wouldn't be here.
Is Josh an unknown twin of Adam Levine? Just realized the similarity. Not sure I've seen a thread with this many deletions. Anyway, yes, there are positive and negative experiences to be had everywhere-including on BP. I've lost money many times on loans and properties. I still get involved because the returns overall are good. I'd imagine that is the reason most posters on BP continue, even if they've been burned from some individual deals. Rich
@Rich Weese - I continue to wonder if we're related -- When he first emerged on the scene (and wasn't completely covered in Tattoos), I was often mistaken for him as I traveled around Los Angeles (and even in Costa Rica). Now that he is covered in body art, we don't muck look like twins anymore.
Thanks for noticing ;)
@Dawn Anastasi - here is a link to a thread where the poster was going after a BP member that had failed to pay on a loan:
http://www.biggerpockets.com/forums/51/topics/51592-johnstown-pa-real-estate-attorney-
And I know of one BP member in my region who had borrowed from a non-member private party and that private party had to foreclose. Of course that same BP member had a bunch of bank loans also foreclose. So being a BP member is no guarantee of a person's character ...
A caution folks, no names as to borrowers or lenders should be mentioned in the public forums. Lending activities by any institution or any private party is a confidential business transaction and giving details can cross several lines. Unless you have a legal finding, bankruptcy or such that is public, disclosing names or issues can get you in trouble.
BP is just a virtual street full of people interested in RE, don't treat them any differently than anyone else on any other street. :)
Not to mention libel. This is a great place to discuss case studies and lessons learned. Frustrated as anyone might be, names are not appropriate.
It’s fine to loan to someone who happens to be a participant on BP. You don’t loan because of it.
Jeff - Libel is only the case if what is written or broadcast is untrue or false.
That said, I agree completely with what you said:
It's fine to loan to someone who happens to be a participant on BP. You don't loan because of it.
The same applies for people that you know through any other social grouping as well.
@Joshua D. , Maybe, but it's no fun having to defend yourself after making an offhand statement that's mostly or even entirely true. Figuring out what's true and what's not can be a real pain when it comes to financial matters.
Maybe the items mentioned here are very clear cut. But frequently in business disputes the participants aren't black and white, but both parties are shaded with some hue of gray. A statement that xxx is a deadbeat who didn't pay per our agreement can cause lots of trouble if the person making the statement has even a little of gray on their white suit.
Virtually no large company today will give job references because of the potential for lawsuits from stemming from disputed facts. Just too risky. As is publicly accusing folks of financial shenanigans.
But it's your house and rules.
@Michael B. - I'm not telling people to out people or name names. I'm just clarifying what libel is -- nothing more.
Lenders have a responsibility and obligation in keeping personal information confidential. Even a private lender that requires confidential personal information as a condition for a loan or any transaction takes on the liability to keep such information confidential. Any lender will be held to a higher standard than say a partner, but any party to any business arrangement has similar duties.
Next, gossip is unethical. Keep in mind that people who talk about others will likely talk about you as well.
If you are in a position where disclosure of facts, like a late payment or default is necessary as a normal course of business and you disclose such to one authorized to receive it, then that is different. :)
I have seen the same and was burned by such instances of fraud. Fake B-C docs, fake escrow companies, etc. are all risks in the transactional funding world. Don't these people realize that there are so many ways to make money legally! Obviously they don't or are just to lazy to do so.
I just got a transactional funding application in today. Buying for 30K and flipping for 58k. Amazing deal right?
I did some checking and lo and behold the A seller had died the day after the sales contract had been signed. Hmmm, wonder if this deal is legit?
When 4 out of 5 applications you get are bogus it kind of makes you want to stop being a lender you know?
I am not sure I agree with this but am unsure so will post this as more of a question.
At least here in CA, any lender giving a loan secured by RE and any borrower receiving said loan on said RE becomes a matter of public record via the deed of trust recording, therefore, I see no expectation of privacy as far as names go. Now, giving out a SSN or other personal info is definitely not something you want to do, but asking and receiving the name of someone who borrowed and failed to perform seems legit to me. If I am wrong, please explain how.
Taking that one step further, when the borrower defaults and the lender files a NOD, that too is public record and has the borrowers name on it.
I try to keep things off BP. However, as a long time member on BP (not too active any more) I've been asked many times for a heads up on other BP members in regards to loaning money or other dealings in PMs. There are some members that I give unequivicable approval on. There are others I wouldn't touch with a 10 foot pole. This is most likely the same as any other social info site. I continue to reply when asked...Rich
There is a difference in posting personal information in public forums, I'm sure everyone sees that.
As to performance, a post was made where the loan was worked out and eventually paid. If the lender agreed to change the terms under the circumstances it wasn't a default to mention per se to imply a loss to the lender. Not disclosing circumstances may not be the correct way to report the manner making it sound like it is something that it was not. Some guy gets hit by a bus and in incapacitated for three months is not like someone who just refused to pay you.
Lenders talk to lenders just like borrowers talk to borrowers, that's reality, it's done quietly and in confidence and is just human nature. A real inquiry, verbally or written has a business purpose and the ones discussing issues should be professional enough to keep personal opinions out of the conversation. I recall one banker that would tell me all kinds of personal issues about someone, everything he knew it seemed. As I said, people who gossip about others will gossip about you too. The professional and ethical line needs to be drawn as it may apply to the circumstances. You are screwing with someone's reputation and reputation, is what you are claiming accurate and fair?
Will, public notice that business has been conducted is in no way an authorization to release information concerning either party, there is just no connection there.
See how far you get with this phone call; "hello, Mr Banker/Lender, I see you filed a DOT given by Joe Doe, I'm thinking about giving him a loan, how has he paid you on your loan, is he honest, does he perform, any issues with this guy?"
If that banker starts tlking about that borrower on those matters he is in violation of personal information disclosures, pure and simple and doubt seriously any banker does that......unless there is a personal trusted relationship with that person asking, which is still unethical conduct.
If anyone has a question as to ethical and lawful disclosures you should ask your attorney.
Anything to do with anyone's personal financial circumstances is confidential information, that goes to the reasonable person test, is what you are putting out something that person would reasonably put out in public? Probably not, so splitting hairs will fall on deaf ears as to what a reasonable person would consider as information given in confidence. You can be liable for such disclosures even if you are correct. :)
I am not sure I agree with this but am unsure so will post this as more of a question.
At least here in CA, any lender giving a loan secured by RE and any borrower receiving said loan on said RE becomes a matter of public record via the deed of trust recording, therefore, I see no expectation of privacy as far as names go. Now, giving out a SSN or other personal info is definitely not something you want to do, but asking and receiving the name of someone who borrowed and failed to perform seems legit to me. If I am wrong, please explain how.
Taking that one step further, when the borrower defaults and the lender files a NOD, that too is public record and has the borrowers name on it.
I know what you are saying, but many lenders (and borrowers, for that matter) don't want and don't have their personal name in public. As a lender via a trust, my name is frequently on nothing public. The flip side (no pun intended) is that in investigating borrowers, I sometimes find people who have owned (as principal members) LLCs that failed (e.g. builder with 17 foreclosures) and do not disclose their affiliations when working with me for a project. To me, as a lender, I'd like to know about that association. I only caught this guy at the 11th hour because of a goofy deed transfer at the end of a prior year (this deal happened about 5 or so years ago) where he deeded out of an LLC to his wife's name and back in to the LLC a few weeks later... all in, from what I can tell, a ficticious sale/transfer related to one of his foreclosures?... or maybe some tax issue? I don't care. The red flag went up when I saw the LLC association and that was the end of my involvement. But if I didn't catch this, how would (from public record) a person know? The interesting thing (at least for me) is that he did indeed seem (based on public record) to have a really good 50+ development performance in a different company just prior to his failure. Of course, that's what he pumped.
So... I can relate to "When 4 out of 5 applications you get are bogus it kind of makes you want to stop being a lender you know?"
I appreciate why banks require a 1003 and underwrite the way they do.
@Bill Gulley you are talking about something completely different than what it have asked or stated in this thread. Shortly after asking Ellis who the party was that did not perform on his note, you made your comments about disclosing personal info. I then stated that the name of the person (or entity) could be given to me as it was a matter of public record via the deed of trust and NOD. At no time did I request or infer that I seemed anything more than that, definitely not "how trustworthy are they, etc"
We are in 100% agreement on what you have stated! however! I am only suggesting that if any lender gets hung by any borrower! sharing the party's name or entity name, as the case may be, is not only ethical and legal, but could prevent other lenders from getting taken from same borrower.
Will, have no idea why you think it's about you, reread what I said, if it's public knowledge it's out there.
Some must think lending is like writing a bad check at some mom and pop store where they tape it under the counter and make it public knowledge.
Not your job to black ball people with lenders. real lenders absolutely don't do that. All the brokers and HMLs out there probably don't get that.
The lack of professionalism comes from asking about people you have no business interest with, there are millions of people out there with poor credit and who have credit problems, kinda like what business is it of yours to bring the matter out in a public forum?
If you don't get that, that's okay. But asking , questions that place Ellis in a position to explain details may put him at risk if he doesn't get everything correct. Do your own due diligence on your borrowers. That's how real lenders operate, they determine the issues from their own processing, they don't call upon other lenders to see if that borrower has had a bad situation or if they are black listed from hearsay.
That's not business that's getting personal, entirely different thing.
When one lives in a glass house they shouldn't throw stones. No lender exists that never screwed up. :)
I did not say it was about me, I know it is not. I was merely posting my counter response for the benefit of clarity for all reading this, nothing more.
As for Ellis, I certainly would not ask or place him in any of your aforementioned situations, ever.
Hope that clears it up. And again, we are in agreement on what you have posted, I concur.