It was a good time in the boom for rehabbers and hard money lenders alike. There were plenty of properties to find and an easy profit to be made. This combination of things made it very appealing to some to make hard money loans or private money loans. I would class the folks who moved into this market as either amateurs or seasoned pros.
Being in a sector of the market that directly observes the fall out from the bust real estate cycle that we are currently in, I get to see first hand the mistakes of the amateurs that decided to embark on the private lending adventure.
Although there are many things that could be pointed to as potentially avoidable mistakes if planned properly from the beginning, I am going to focus on the foreclosure process and avoiding areas of exposure that are left if not properly planned out.
Above all else, whenever you start a new business venture, of any sort, you should always imagine the worse case scenario and plan backward from there. There should also be an exit strategy planned long before an entrance strategy is ever executed. With private money lending the worse case scenario is a default on the loan and potentially having to foreclose on the property. One of the biggest mistakes made by people getting into private money lending is to lend the money personally and not forming a legally incorporated entity whose only line of business is to loan commercial money.
Why on earth could it matter (other than the obvious liability exposure). One of the first things to happen when the loan goes into default is that the taxes and homeowner's insurance is probably not getting paid either. When the insurance lapses on the property, you, the lender, no longer have your interest protected in the property. Should the home burn down or whatever, the buyer walks and you are pretty much out the money. Especially if the buyer goes bankrupt.
What has to happen at the time of lapse is that a force placed or lender placed insurance policy has to be placed by you to protect your interest in the property. The problem? You will have a VERY difficult time finding this type of policy through personal lines. This is typically a commercial lines product, which means very simply that an individual would typically not qualify for coverage. The alternative? You could get a standard homeowner's policy, right. Wrong! It will be difficult to get homeowner's insurance on a property that you don't technically own. You won't be able to do that until the foreclosure process is complete. In most states that is a very lengthy process. That is a very long time to have no coverage on the property and hope that nothing happens.
A little planning up front can save a lot of agony in the long run. Set up a legal entity and only lend through it. This makes the whole process much easier, if the dreaded worse case scenario happens. It may not be impossible to find coverage as an individual for this, but it will just seem like it is.
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