Were you a private lender and lost money in a real estate deal? Did you Joint Venture on a real estate project where the outcome didn’t turn out as you expected? Are you about to loan money to someone for a real estate project? How many times have you heard of money being lent to friends and family, never to be seen again? Better yet…
- Did that Real Estate Guru tell you how easy it is to find money for your deals?
- Did that Real Estate Guru explain how easy it was to lend money on real estate projects from your self-directed IRA?
- Did that Real Estate Guru tell you how much money people lose because they didn’t file the right paperwork?
I didn’t think so…
My heart breaks (as the creator and co-administrator of the Facebook Group, REI Blacklist) as people post their personal experiences of others that they’ve struggled with in this business, the amount of monies lost, and the shock as others realize they’ve also lost money to the same person, similar people, and/or in similar ways.
Much to their embarrassment, they admit they trusted the borrower to do the “right thing”. Regardless of what went wrong, or if the borrower intended to defraud, or if the deal went bad, or if your brother-in-law turned out to be foolish with money, the common issue that runs true with all of the stories is they didn’t properly secure the loan.
Perform these 5 Simple Activities when Lending Money
- Investigate the person’s trustworthiness and history in handling other people’s money.
- Investigate the asset and the opportunity is valid.
- Make sure the asset has no other outstanding liens.
- Employ the attorney and/or title company to draw up the paperwork and file the lien (unless you really know what you’re doing).
- Ensure the lien was filed properly.
Due diligence is the easiest thing to dismiss because there is a money making opportunity in front of us. The opportunity is promising, and most likely in an industry known to bring wealth: real estate. If you are new, you are still reeling from the excitement of your recent training and the enthusiastic based on confirmations of others that have had successes in real estate investing.
Is the Person Trustworthy?
Before going into business with anyone, a simple google search may show some history of their character. You may find previous bankruptcies, arrest records or even see some of their social media activities that can give you a hint about their history and character. Seek personal references, possibly from someone that has done business with them before.
Of the people that report horrible experiences in the Facebook REI Blacklist, this simple step could have saved them a lot of financial harm.
Is the Opportunity Valid?
No matter how experienced the developer is, you must know how to make sure the project will result in the profits suggested to you by the developer. Having the ability to vet the project as a truly profitable project is critical in protecting your investments. All real estate projects suffer some level of surprises, whether an ice storm causes delays, or there is a surprise once they remove the old appliances, or even if they discover animals are living in the home. There will always be something that will “Bite you in the Butt” as I outlined in a previous blog post. You need to make sure the developer is aware of contingencies and surprises.
I reviewed a deal for a developer as a potential gap lender which had a significant renovation plan. The project was opening walls, high end fixtures and more. In looking at the construction budget I noticed they weren’t planning on some of the basics, such as replacing the 20 year old air conditioner or the 25 year old roof. Due to my experience, retail buyer will purchase a renovated property where the Air Conditioning is 20 years old. Either the developer was new, or somehow overlooked this. Once I added those required repairs into the project, there was no profit.
Had someone not questioned that construction budget, that private lender would most likely have lost some of their investment, regardless of the potential profit or interest.
Are there Other Liens Attached to the property?
Ordering a Title Search on a property will discover any outstanding liens, but that may cost you some money. There is an easy way to check the county records to see if any liens exist. Each county has their own interface, so there is no standard way of doing the property search. However, understanding that the county records exist, and most of these records are searchable online for free and can give you a lot of great information.
One person in the REI Blacklist Facebook Group had brought up some concern about a woman he loaned money to, and he obtained a second lien position on a property. Imagine his surprise when others active in the group were well aware of this woman and many others had complained about not getting their funds returned as well.
This got my curiosity up, so I embarked on my own county record search. In my search, I found the first position Deed of Trust, and 4 additional second Deeds of Trust, and the person that brought up the concern did NOT have his deed of trust in the county records.
You can imagine that if he just did a quick county records check on the developer and property, he would have seen 4 other lenders before him. Chances are highly likely that he will never see his money again. (Yes, I question if there was intentional fraud, but that’s another story.)
Do you Really Need an Attorney to help transact the loan?
It depends, but I highly recommend it. It could cost the developer $500-$1500 (yes, you make the developer pay for it), but it will ensure that the paperwork is done correctly and it is filed in the County records. This DOES NOT include a title search, but merely makes sure that everyone is protected in the transaction, that you are not violating any usury laws, and that expectations are clear.
Follow-Up – Ensure the Lien was filed properly
Even some of the most reputable attorneys and title companies make mistakes. I helped one friend verify that her 2nd position lien was in the county records. What I found was that not only was her lien not filed, but there was another second position lien associated with that property and it wasn’t hers.
She notified the attorney of the oversight, but due to that delay, her lien position is now in 3rd position, as the position of the loans are based on the date filed in the county records (in Texas anyway).
In Summary
Even though these Real Estate Seminar Mills tout Asset Protection offerings and recommend you protect your business with multiple corporate entities, I’ve seen more harm come from those that innocently enter into a transaction without protecting themselves on even the most elementary real estate transaction.
What are your thoughts? Did I miss anything?