Lending Private Money SAQs (Should Ask Questions)
Lending money privately can be a great way to earn double digit interest, but you should be careful to whom you lend, and against what. Here are some of the questions you should ask before you lend money
5 Should Ask Questions for Private Money Lenders
Over the past 12 years, I’ve been involved in hundreds of private money lending transactions as a lender, borrower and broker.
During that time, I’ve seen plenty of deals that haven’t quite gone to plan.
One thing I’ve learned is that those lenders who gathered the most information before offering terms have been able to make better lending decisions and avoid risky deals.
Here are 10 questions every lender should ask before they fund a new loan.
Who am I Lending to, Exactly?
While this may seem obvious, it’s often a little more complex.
In most cases, you’ll be lending your money to a corporate entity such as an LLC, and LLC’s often have more than one member.
You should be aware of ALL members, their percentage ownership, and any input, duties, oversight or decision making they are assigned.
Pro Tip: Ask for a copy of the Register of Members, Operating Agreement, and any Corporate Resolutions. Verify the identity and role of every Member, and factor them into your lending decision.
Is the Borrower Capable and Competent?
While some lenders will extend term to first time real estate investors, many prefer to work only with borrowers that are able to demonstrate their competency, capability and capacity for completing similar projects.
With that in mind, you want to see evidence of recently completed projects. Remember, a fix and flip is a different kind of project to a long-term rental, each with a very different exit strategy for the lender.
Pro Tip: Review settlement statements and contractor invoices for previous projects to show purchase price, rehab cost (if any), timeline to completion, and sale or refinance of the property that funded the settlement of the private money loan.
Is the Real Estate Valuation Accurate and Achievable?
When you are lending money privately, the real estate acts as the final backstop for your investment. If everything else fails, the property can be sold to recoup your investment.
With that in mind, it’s important to understand the value of the property as every stage of the project, and there’s a lot to consider here.
Often if you’re lending against real estate that requires some value-add renovation such as a fix and flip, or even a rental property, the value will change throughout the lifecycle of the loan as work is completed.
You need to understand the disposal value of the real estate at every stage in order to properly understand the risk involved and offer loan terms that are appropriate.
If the borrower fails, will you aim to complete the project yourself? or will you simply seek a foreclosure sale? And how much of the total value are you prepared to lend?
Pro Tip: Ascertain the as-is value of the property, as well as the after-repair value (ARV), and offer terms that protect your investment throughout the life cycle of the loan.
Is the Scope of Work Accurate?
Whenever I’ve seen a privately funded real estate project go wrong, it’s usually because the renovation required more time and money than was originally anticipated.
With that in mind, it’s important that you feel confident not only in your borrower’s capability and competency, but also the veracity of their plan.
Pro Tip: The key questions to answer here are; Is the costing of the Scope of Work accurate in terms of materials and labor? Is the planned renovation appropriate for the exit strategy (retail fix and flips will be different to long-term rental to be refinanced for example)? And, is the planned timeline accurate? It’s also useful to know if the borrower intends on doing some or all of the work themselves, or are they hiring a contractor? Is that contractor ready to start work immediately? And did that contractor provide the costs for the Scope of Work?
Do you Have Viable Contingencies in Place?
Private lending – just like life itself – doesn’t always go to plan. When things change unexpectedly, or just don’t quite work out as you hoped, it’s important to be able to pivot from your original plan and make the best of the new situation.
Your borrower will certainly have presented you with their Plan A, but you also want to hear about their Plan B (and Plan C if possible).
You should also have a Plan B yourself. If your loan falls into default, what will you do? Will you foreclose immediately? or will you prefer to work out a solution with the borrower if possible?
Pro Tip: Always be prepared to pivot. For example, if market conditions change and the borrower can no longer refinance, can the property be sold for a price sufficient to repay your loan, or vice versa.
So, there you have 5 questions every private money lender should ask before lending any money.
Of course, there’s a whole lot more to lending money privately, and the success or failure of your efforts in this space are directly correlated with the quality of your underwriting process.
The more questions you ask, the more you will understand the risks, and your lending decisions will be better as a result.
Pro Tip: Join 5,000+ investors and see brand new private lending investment opportunities in your inbox every Thursday
Useful Links and Resources:
- Private Money Lending Case Study December
- Private Money Lending Case Study November
- Private Money Landing Case Study July 2022 II
- Private Money Lending Case Study July 2022 I
- 5 Pro Tips for Vetting Private Money Lending Borrowers
- How to Lend Money Legally and Safely
- Private Lending 101 | The Complete Guide to Private Money Lending
- What is a Note and What Terms Should It Contain?
- The Private Lender’s Guide to Assessing Credit Risk
- Understanding Lien Position and Priority