Private Money Lending: The Importance of Due Diligence and Protecting Your Investments
You know your money isn’t making money sitting in the bank. You know its best-case-scenario returns on investments in the stock market are 7%. Inflation is on the rise, and there are plenty of real estate opportunities to invest in. Every rookie, professional, and criminal say the same thing “double-digit asset-backed returns!”. So how do you know who to invest with?
The Initial Decision-Making Process and the Need for Due Diligence
In the world of private money lending, particularly within real estate investing, the initial decision-making process is often rooted in trust. However, the pathway to successful private money lending isn't as simple or safe as it initially seems. This section highlights the importance of due diligence in mitigating risks and protecting investments. This may be a leader in the community, a personal friend, or a family member that you’re trusting with your hard earned money.
Background and Experience
I was a law enforcement officer for seven years. While I found the work to be rewarding, it was a bummer that the best case scenario was I put someone in jail. Prison isn’t known for reforming society and it just costs tax payers money. BUT with the criminal put away they (at least temporarily) could no longer harm others. I find “real estate gone wrong” to be a similar conundrum when people get into business together and are exchanging large sums of money. When things go wrong it’s easy to identify. But reducing the risk for these situations is possible with due diligence.
What Everyone Does: Underwriting the Deal
Everyone says “underwrite your deal” “make sure it cash flows” but what they fail to remember is that deals don’t default on lenders, people do.
Bad deals and good people mean you’ll still get paid. Bad deals, and bad people mean you may not. Good deals, and bad people also may mean your money won’t come back.
You see, it’s about more than underwriting.
Many private money lenders are swayed by the borrower's leadership role in the investor community, friendship, or feigned expertise. There’s comfort of lending within a known circle and you’re anticipating regular monthly returns. This assumption, coupled with the faith in the borrower, convinces them of the safety of their investment. Unfortunately, this trust-based approach can lead to serious pitfalls. Instead of the expected returns, lenders may face an assortment of inventive excuses.
Avoid PML Loan Defaults
You’ll find yourself tangled in a web of phone calls, vague commitments, and elusive repayment timelines and they have the nerve to treat YOU as the bother. When situations escalate, you may be pushed to seek legal counsel, facing costly retainers and time-consuming back and forth potentially escalating to years in court. The aftermath of such situations is not just a financial setback, but also a drain on time, energy, and in some cases, strained personal relationships.
Due Diligence Services
This is where the importance of due diligence shines in private money lending. Our proactive due diligence service offers an invaluable tool in protecting your investments. Regardless of who your potential borrower might be - a friend, a family member, or a well-recommended individual - professional vetting is essential before you commit any funds. Our service provides a clear, thorough analysis of your potential investment, the borrower's credibility, and the risks involved, thereby protecting your investment. By having a clear understanding and setting legal boundaries, you reduce the chances of miscommunication and financial loss.
