Mitigating Risk for Private lenders

In a recent blog I talked about opportunity for private lenders in today's economic climate:

Opportunity for private lenders who are looking for bigger returns on their investments than what they can get in the stock market, or with other investments. Why? Because many borrowers cannot find funds or credit to purchase a house, a home or an investment without it.

So how does one mitigate risk as a private lender?

Ask questions and keep informed. Do business with people you know and trust. Ask for references and referrals if you are working with a borrower for the first time. Look over any prospectus or financials they provide, and ask questions if you do not understand something. Look at track record and history. Ask for testimonials from other lenders. Ask to see their credit report, tax statements, or proof of funds.

What are they offering for collateral? What other liens are on that piece of collateral? Is it generating any income? Can you drive by and take a look at it? Will you be listed as co-insured on any insurance policy?

Make sure you have a written promissory note, and have your attorney or financial advisor review it. Make sure your warranty deed on the property is recorded in the county where the property is located. Ask for a copy of the insurance policy. Check to make sure that property taxes are being paid. Ask for a Title Report in order to verify that there are no other liens; or if there are, that your lien is not so far behind others that you would risk receiving nothing in the event of default.

A savvy borrower will anticipate these questions, and provide you with the information you need to feel comfortable lending money. Look for terms that work for you: interest rate, length of term, ability to call the note due, clauses that proscribe action in the event of default, etc.

It sounds like a lot of due diligence, but becomes easier as you become more familiar with the issues around private lending. Trust, but verify. Do your homework, and enjoy the passive income that your private dollars can generate!