A False Sense of Security

By on May 23, 2017 in Real Estate Investing | 4 comments

            Over the last few years, I have encountered various private lenders who have come to me with tragic stories. The stories go something like this. They positioned themselves as private lenders in either the rehabbing or quick-turn market. They set forth their lending criteria and began to develop their lending standards. They were contacted by prospective borrowers. One of these prospective borrowers seemed to be so agreeable, cooperative and easy to work with. They were quick to do whatever was asked of them by the lender. The loans were made and repaid. The cash flow looked good.

            What the private lender didn’t realize is that this particular borrower had a track record of “priming the pump,” meaning they would do a few deals, make things look good, and then gradually try to get more and more freedom or tolerance. The lender made more exceptions for them because they were so agreeable and easy to work with. Then bigger deals were funded, a new escrow agent or company was introduced, and all of a sudden, the money was gone.

            What happened was that the lender was lulled into a false sense of security by the borrower’s personality and cooperation. By failing to stick to the basics and pay attention, and not dotting each “i” and crossing each “t” of the due diligence checklist for each deal, the lender got taken advantage of by the predatory borrower.

            The fact that there are conniving, manipulative borrowers out there who target and take advantage of honest, hard-working, good investors disgusts and enrages me. Here are a couple of simple rules to think about:

  1. Lend on the basis of both the person and the deal, but the deal matters more than the person.
  2. Absolutely insist that all of your lending criteria be acknowledged by title and escrow. Use a title and escrow company that you have selected or personally vetted.
  3. Be quick to question procedures and verify the accuracy of the information, and be slow to fund.
  4. Make sure all of the protections that are available to you as a lender are properly in place.

            If your borrower gets concerned or acts miffed about these things, then perhaps you need to tell the borrower that if the situation were reversed, you would expect them to be just as careful as you are being.

            The bottom line is that YOU must exercise due diligence and have STRONG procedures, controls and checklists for private lending.

    4 Comments

  1. I was a victim to a being lulled into a false sense of security! It happened when I first got started into Real Estate investing. I answered an ad in the newspaper that read; $250,000 note for sale secured by Real Estate. I was thinking flip the note (broker) to another investor. When I was contacted the person that placed the ad he arranged a meeting. This person show me a notebook of deals that they have done fix and flips. He ask me if I had any retirement money and told me how to roll it over into a self direct IRA so I could lend for his deal. He assured me that my money was safe because the property had plenty of equity! The plan was to rehab it, put a tenant/buyer in the property and after2-2.5 years the tenant buyer would purchase the property and I would get my money back with 12% interest. I lent this man (company) $42,000. A year later I received a letter saying the property was going to foreclosure! I tried contacting the company (owner) and his attorney! Neither one would answer my phone calls or emails! I contacted an attorney and they said it would be $10,000 to start to go after this person and his company and no guarantee I would win and get my money back. I would then be out of over $50,000 or more. I talked to several other attorneys and got the same answers. It turned out I was 3rd position not 1st on the title and it was a subject-2 deal and the this guy walked and lost nothing and lost $42,000 of my retirement money because I was wiped out by the other liens in front of me. I learned the hard way, only lend when you are 1st position on title and do not lend otherwise! I am still angry and when I see this company online it pisses me off that he is still doing business. I have told several REIA’s about this company and they have banded him from their REIA.

    Chuck

    May 23, 2017

    • Sorry this happened to you. Did the borrower sign a personal guarantee for the money lent to his company?

      Jeff Watson

      June 9, 2017

  2. Great advice thank you for sharing that. All it takes is one or two greedy
    Investors to make it more difficult for the honest ones.

    Jimmy Lansing

    May 23, 2017

  3. Hi Jeff-
    I can heartily attest to the truth of all this. I have had several tragedies in my life as a hard money lender, and each time I have learned the hard way. I can blame the borrower, but in the end, “The buck stops here,” as I am the one who chose to fund. A scam artist may not really start out with an intention not to pay back, but after finding themselves in a difficult situation, may well decide that you the lender are at the bottom of his priority list. An unsteady investment can make a scammer out of just about anyone when the going gets tough!

    margaret smith

    May 24, 2017

Post a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>