How to plan for the “What Ifs” of private money
I was interviewing a private lender, who I was asking $200,000, to loan on a project. This individual started asking me all kinds of questions that were real life situations. They could happen! They were situations that could cause the lender to lose their money. The questions were based in facts and the session was easy for me because I had the experience and knew all the answers. I had the knowledge and 35 years of borrowing lots of money. The session was very insightful because the investor was prepared with great questions. There were few questions that the potential private lender did not like the answers that I gave, but it is always hard to swallow the answer “you could lose everything just like in the stock market.” The risk management was very important to the private lender, but just as important to me, was to have everything out on the table, to have a good rapport and an open conversation.
Here are some risk management questions the borrower will want you to be able to answer. If you like the answers then the next steps would be to invest with the borrower. If you don’t like the answers or if they cannot answer then “RUN AWAY”. What I really would like you to do is ask me these questions, to see if the answers will make you feel more comfortable in lending to me and on my projects.
What happens if the borrower stops paying the private lender?
What is the cost of the opportunity? What happens if you find a better rate of return 3 months later and cannot invest in that opportunity?
What happens if you don’t have a balanced portfolio? Should you have large loans in your portfolio or only small ones or a mix?
What happens if the borrower declares bankruptcy?
What if the house burns down?
What if the property goes into eminent domain?
What if a superior lien shows up later and must be paid?
What if the borrowers stops paying?
What if the senior liens starts to foreclose?
What If the contractor walks off the job and it not completed?
What if you don’t like the house and as a lender you don’t want to own it.
What if there is a natural disaster that hits the house and wipes it out?
What if the borrower is paying you but not the taxes?
What if the city stops the project because there are no permits?
What if the city stops the project because the zoning doesn’t permit the use?
What if the borrower cannot pay the utilities?
What if the borrower runs out of money to finish the project?
What if the value on the property values drop while the project was in progress?
What if the source of your money you are lending is adjustable or at a higher interest rate than the rate you are lending it out?
What happens if the borrower dies?
These questions/ scenarios have happened to other people. Why not prepare yourself so that these scenarios don’t blind side you? Thinking ahead and having a plan is the best source of preparation a lender can have. They may never happen to you. However planning for the what ifs, can help you in the long term. Being proactive by setting up some systems to prevent this from happening to you, my private lender, is a good start.
Some of the solutions are easy to create it only takes money. Who should be paying these expenses? Some of the solutions are easy to create it only takes your due diligence.
What if we plan for success, then chances are high that we will succeed.
