A False Sense of Security
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:
- Lend on the basis of both the person and the deal, but the deal matters more than the person.
- 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.
- Be quick to question procedures and verify the accuracy of the information, and be slow to fund.
- 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.