There are many ways to invest in real estate, and one of those ways is to serve as a private lender for other real estate investors. Private lending comes in many shapes and sizes, from full-time hard money lending companies to mom and pop investors who lend funds to investors they know personally or meet through networking groups. This can be a great way for the investor to earn above market returns on their money, but can also result in the lender losing money give to the investor. Many investors are highly leveraged so if something goes wrong when the loan is fully secured by real property, the investor may file for bankruptcy or otherwise have no money to pay back the lender.
Examples of when Private Lending has Gone Wrong
Unfortunately, we have seen many situations where private lending has gone wrong and there are limited recourse for the lender.
For example, in one instance a private lender provided funds to an investor who committed suicide. After the death of the lender, it was discovered that there were seven deeds of trust on the Missouri property that was intended to secure the debt of the investor. In another situation, a private lender lent funds to an investor who executed a mortgage on a Kansas property to secure the debt. The mortgage was never recorded and the investor sold the property. The lender was then left chasing after the investor for repayment of the debt without the security of the mortgage. In another case, a private lender, who was located out of state, provided money for the purchase and rehab of a Kansas City property. The investor provided numerous updates stating that the property was being renovated, but after the maturity date came, the private lender learned that no work was done and the investor shortly thereafter filed for bankruptcy.
Having the Right Paperwork
The first step to ensuring that you are protected as a private lender is to ensure that you have all of the right paperwork. This includes a loan agreement, promissory note, and mortgage (Kansas) or deed of trust (Missouri). It may also mean filing other security instruments, such as an additional mortgage or liens against other property owned by the investor.
Many of these documents can be obtained online; however, there are always risks to using online documents. For example, a document drafted by an attorney in North Carolina, may not work in Kansas as each state has unique laws when it comes to real estate. Additionally, the contracts may be copyrighted. The most reliable online forms are the Fannie Mae Uniform Interests, but even these have limitations as they are drafted for residential transactions and not investment lending.
Rick Davis Real Estate Law can draft the documents necessary for your private lending transaction. The complete set of documents will range from $500 to $1,200 depending on the terms of the transaction. To learn more about having private lending documents drafted, including our process and more detailed pricing, please go to our contract drafting webpage.
Lender’s Title Insurance
The second element of protecting yourself as a private lender is to obtain a Lender’s Title Insurance policy. A lender’s title insurance policy is a policy that pays the lender the amount outstanding on the loan if there is a defect on the title for a property used to secure a loan, such as another mortgage or deed of trust. The cost for a title insurance policy will vary, and our rates our posted on our website at Title Insurance Rates. Compared to the cost of losing the security for the loan, the cost of title insurance is very minimal. Moreover, the importance of title insurance is demonstrated by the fact that major lender’s require title insurance on every loan that is secured by real property.
What if The Investor has Already Stopped Paying?
If you are a private lender and the investor has stopped paying, there are many options available to you, including potentially foreclosing on your mortgage or deed of trust, or suing the investor for the unpaid debt. Because investors often don’t have W-2 income to garnish, we recommend working with an attorney with specific experience collecting on private loans to investors.
To learn more about our collection services, please go to our Collections page.