What’s one of the best things about investing in loans?
It doesn’t matter if the market is up or down. Your money will be always be protected (if you do them right), and you’ll always find checks arriving in your mailbox.
But before you invest in loans, you need to make sure they’re good ones.
Last post, I shared the first foundation block to a good loan: good properties.
Today, I want to reveal the second key foundation: good borrowers.
In hot and cold markets, you want someone you can depend on to 1) keep you protected and 2) confident your payments will arrive on time.
So, what makes up a good borrower? Here are my top 3 requirements:
Proof and history. They have a solid history and proven concepts for their business (be that rentals or other investment like fix and flips).
Reliable income and reserves. They do not solely rely on the property to make their payments.
Honest communication. They do not hide any material facts, they’re happy to keep you updated, and they’re never late with payments.
Basically, you need to find a borrower who you enjoy working with and creates a win-win relationship. A loan with this person should not create extra work for you.
It’s really as simple as that.
So, now that you have a good property and a good borrower to work with, how can you make sure your loan is secure? That’s up in our next post.
Ready to build your foundation for good loans? Contact us today and see how we can help you succeed in private lending.
Email us a question at Mike@TheNoteShop.com
Schedule a 30-minute consultation.
Enroll in my personalized coaching services.
Did you enjoy Private notes-Income and Security #2? Check out:
A strong asset and payment stream are the keys to backing all your investments.
How do you do this? By establishing a solid foundation of good returns through good loans.
Good loans are made up of 3 key components:
Good properties
Good borrowers
Good security
Lets start by looking at number 1 in this post and follow up in future posts with 2 and 3.
Good properties.
How can I keep my money working safely for me in any economy?
The first step is to find good loans. And the first step to finding good loans is to find good properties. Because real assets are the BEST way to protect your money.
That’s what I want to chat with you about today.
Good properties.
They are the first foundation block to creating good loans. But what makes a good property?
Here are my top 3 musts:
Must be highly marketable. That means it should be:
In an area of demand
In good condition
A functional home
The property must produce income for the borrower. Think rentals, small commercial or fix and flips (from the sale).
Must be in locations you understand and like. Loan in areas that fit your comfort level. If you are from a small town loan in small towns. If you are from the city put your money to work in the city.
Remember, a real asset (that you like) to protect your investments is the first key building block to good loans.
Ready to build your foundation for good loans? Contact us today and see how we can help you succeed in private lending.
Email us a question at Mike@TheNoteShop.com
Schedule a 30-minute consultation.
Enroll in my personalized coaching services.
Did you enjoy Private notes-Income and Security #1? Check out:
How would you like to lend someone money on a property that you think you’re in a good, secure position with? But then you find out they never owned the property to begin with?
Trust me, it happens.
Everything looks great until payments don’t arrive, and you hire an attorney to foreclose on the property. That’s when you find out the borrower never owned the property and had no right to put a lien on it. Worse, if a lien was actually placed on the property that someone else owns, you will have the extra cost of releasing the lien.
Believe it or not, there are brazen thieves in the world who will fake ownership in properties. They might rent and/or borrow money on them.
So, where does that leave you and your money?
Unfortunately, by the time you discover all of this, most or all of your money will be gone. You’ll probably never find the person who stole it. If you do, they will likely have spent it all.
How do you protect you and your money from a fake owner?
Most thieves are always looking to talk you into a shortcut.
They will tell you, “It’s just a waste of money to involve outside resources for a simple process like a loan.” After all, you both can go right down to the county and record the mortgage or deed (aka, the lien). You can literally watch them hand the lien over to the county and get a receipt to prove it’s recorded.
Guess what?
The county does not check who owns the property when an item is recorded. They simply record what’s handed to them.
So, great. They recorded the lien, but the lien is not valid, and your money is not secured. More likely, it’s gone.
This is another reason you should involve outside resources on such a large money transaction.
The key to stopping thieves is to require every loan be closed, insured, and recorded by a title company. A title company will check and verify the borrower actually owns the property and you’re in the lien position you’re expecting.
If a thief is good and brazen enough to fool the title company, the title company will pay you back your money and write off the loan. But this only happens if you actually pay for a title insurance (aka, a loan title policy).
Title insurance gives you peace of mind that your loan is secured and valid.
Most thieves will never agree to this because they know they’ll get caught. To avoid getting caught, they will try talking you out of purchasing title insurance. They usually do this by pointing out the costs and time involved.
Regarding these so-called costs: If a borrower goes to a traditional lender or bank, they will pay thousands of dollars more than a private lender. So, the cost of title is on the borrower, not you. If they don’t want to pay for title insurance, then fine. They can find another lender and you can find a better borrower; someone who’s grateful and happy to pay a little extra to ensure your funds are secure.
Never listen to a borrower if they claim these costs are nonessential. A quality borrower will be focused on protecting your money by using third party resources, like a title company to close and record.
Where to find more loans than you could ever fund, or ever want to.
The Simple Private Loan Marketing System
You’ll be surprised by how quickly people will start calling and asking you to lend them your money.
Truly, it’ll shock you.
So, if you’re worried about being loan-less, don’t. You’ll have plenty to pick from.
It won’t be about finding people to talk to you. It’ll be about sifting through and figuring out the loans and deals that are good for you.
Start where the demand is and the loans can be secured…real estate investors.
Lets keep this simple and just the top five ways to find private notes.
Join the meet-ups. One or two posts will typically be all you need.
Talk to local property wholesalers. Quick Google search will help you locate them.
Call other private money lenders. They always have deals they can not fund.
Check with you local small community bank.
Post on places like Craigslist.com
Here is the secret…there are more people looking to borrow money than there are active lenders. So be selective and only fund loans you feel are good solid investments.
Before you start lending have a plan for your money and what terms you are willing to offer. Don’t go looking for private notes until you know your ideal loan and borrower.
If you have a question or need help finding good secured notes you can reach out to us and we would be glad to assist. You can reach out to us through the contact us form located at the top of the page.
Private lending Warning #4…OVERFUNDING THE PROPERTY WITH MULTIPLE LOANS
Have you ever had a borrower need money now?
They have the deal of a lifetime and don’t have time to mess with using title for closing. They’ll even record the deed themselves to speed things along. After all, they have successfully closed hundreds of deals, so you can trust them to record your deed.
CODE RED!
DON’T TRUST ANYONE TO CLOSE YOUR DEAL EXCEPT TITLE.
As mentioned above, thieves will try and claim title is just a waste of money and they would rather see you get a better return than throw it away using a title company.
For example, take a look at this $30-million-dollar scam that took place in western Colorado:
A scam artist raised over $30 million from local investors by promising them first deeds of trust on the properties he was buying. To save time and money (or so he claimed) he asked most of the private lenders to come into his office and complete the paperwork. He then took their money and gave them a loan and deed. Each lender thought they were in first lien position.
Unfortunately, they weren’t.
The borrower lied to all of them.
When the Feds finally showed up, all of these lenders were left with about $5 million to split. That might sound like a lot, but it wasn’t. Most of their money and investments had vanished. And it all happened because these lenders chose to trust the borrower and not use a title company to close their loan.
The few who did use title forgot to tell title a very important fact: “I want to be in first lien position.”
So, they too lost most of their money.
Yep, you read that right. If you don’t tell a title company you expect to be in first position, you might end up in a much lower lien position (like 3rd or 4th). That means if something goes wrong with the loan, you’ll have other lenders ahead of you that get paid first.
SO ONLY FUND THROUGH TITLE WITH SPECIFIC INSTRUCTIONS.
Never worry about saving the borrower time and money. Save your time and money from them.
(Check the FBI files to read more about the $30-million scam.)
Here is a simple roadmap of the private lending process.
Please use this to just get a overview of how the loan should move through the process.
If you are lending thousands and even hundred of thousands of dollars on notes please take the time to understand the ins and outs of the full note process.
The value of the real estate is your number one protection for your loan. This is the asset behind all the money you’re lending.
It’s the real asset that’ll keep you protected.
But what if that asset isn’t worth as much as the borrower claims?
In all the years I’ve been lending, it still surprises me how far off some people are in their valuation of properties. So many will compare their run-down property to a completely remodeled house and think they would have the same sale price/value. Or they show you a comparable of homes close to their own that are from a higher end subdivision.
For example, my brother lives in a house close to our current office. His home is what I would call a mid-priced home for this area. Within a mile of his home, there are three distinctive subdivisions all separated by a single street. You can tell by driving through the properties they are at different price levels based on the materials used for construction, lot sizes, and amenities.
In this area, the same size house could range from $400k (entry level) to $500k (mid-area), to $750k (nicest subdivision). This is a huge difference in value and what an owner can sell their property for in the future.
Let’s look at an example for a loan of $400k on these properties and evaluate the level of security for the lender (you).
For a home in an entry level subdivision ($400k), your loan will be at the full value of the property. In our opinion, this would be a high-risk investment. What would happen if you had to take the property back and sell it? You would probably lose money with all the costs to foreclose and sell the property. You’d likely walk away from this deal in the red.
For a home in the mid-level subdivision ($500k), you have decent protection with over 30% equity above the loan you have on the property. So, the risk might be worth it.
For the final home in the high-level subdivision ($750k), your security is almost at 50% of the value. So, you’re fairly safe.
Which security would you prefer? Most likely, you’d opt for the higher amount of equity to protect your money.
The problem is, we don’t always know the value of a home. If someone doesn’t know an area very well, they might go online and be blind to the differences between entry, mid, and high-level housing.
It’s also easy for thieves to exaggerate the value and put you in a lien position that doesn’t cover all of your loan.
Exaggerating value is a huge issue.
It shows that the borrower is a thief or that they’re so new to investing, they don’t understand real estate valuation.
How do you protect yourself from over valuation?
If you can, always drive by the house or through the neighborhood to see if there are distinct areas that are different subdivisions.
Hire a professional to value the property for you.
Find an appraiser you can hire or;
Locate a realtor who works in the area and pay them to value the property for you.
Let the experts come up with the value and trust them. They are unbiased and understand the different types of properties and neighborhoods. It’ll be worth your time and peace of mind to spend a few dollars to get professional advice.
Above all else, do not trust the value from the borrower. It doesn’t necessarily mean they are trying to lie to you. They simply might not know the value of the property.
Rely on your own due diligence and that of the professionals you hire to protect your loan.
Private lending Warning #2…NOT USING A THIRD PARTY FOR CLOSING AND DOCUMENTS.
Another popular way for private lenders to get scammed is allowing a borrower to provide all the documents (loan, mortgage, deed etc…).
This might appear to make the process easier for everyone (especially when you don’t have any documents in your back pocket). But it won’t be easier. It’ll only lead to problems. Possibly devastating problems.
Let’s check out an example:
I once had a client, Jennifer, who lent money to a person on one of their homes. This person was a local real estate guru, so Jennifer thought she could trust him. She went ahead and let him write up all of the documents.
He completed them and she funded the deal.
Fast forward six months…
The loan ran into problems and Jennifer wanted to collect.
Guess what she found out? Not only did her borrower not file a lien, but he did little to protect her in the promissory note he created.
When she came to me for help, we discovered the note did not allow for her to collect any attorney fees or default fees. So, the borrower could keep using her money, unless she wanted to pay thousands of dollars out of pocket to collect on the loan.
The best she could do was get her principal back, while he continued to hijack her money at little to no cost.
Why was he able to hijack her money?
Because he wrote up all of the loan documents and MADE IT LEGAL TO STEAL!
I am Michael Bonn, the owner of The Note Shop. For over 23 years, I have been involved in non-traditional and private real estate lending in Colorado and several U.S. states.
My company has been fortunate enough to oversee and close hundreds of millions of dollars in secured real estate notes.
In my experience, I can tell you there’s no better win-win strategy to earn an above market interest rate. Why? Because you’re putting your money to work right in your backyard with local individuals. That means you’re creating jobs where you live.
On top of that, borrowers get easy access to money to keep their portfolio growing, and you’ll find interest rates above those offered by banks, annuities, and bonds. This works great for all funds you are looking to grow without the roller coaster of the stock market. These funds might include:
Savings Accounts
Retirement Accounts
Trust Accounts
Business Accounts
If done correctly, secured private lending on real estate is a great option in all economic environments.
So, with 20 plus years of experience, I have learned what to do and—more importantly—what not to do when lending directly to a borrower.
That’s why I wrote this booklet. It’s intended to show you how to protect yourself and your money by keeping an eye out for scams and other warnings that lead to robbery and headaches.
Of course, there’s no way to list every possible scam or warning in the private lending industry. But these top ten cover the majority of issues you’re most likely to stumble upon during your private lending journey.
Now, be aware, I’m not a lawyer. Therefore, I’d never give or intend to give legal advice. But given the large amount of money you’re looking to lend, I feel it’s vital you understand the possible pitfalls, do your due diligence you, and engage knowledgeable people who can help. That includes a good attorney and title company.
So, without further ado, let’s take a look at
Top 5 WARNINGS
Hijacking a Wire
Why do we see all of these warnings from the local and national title companies and closing agents?
We see these warnings because money is vanishing right before everyone’s eyes. In a flash, hundreds of thousands of dollars are gone!
Every day, money disappears and heads overseas before anyone can do a thing about it. (Yes, the government could control this, but they have chosen not to.) This tragedy happens when both sending money for a new loan and receiving money for a payoff.
What does fraud look like, and how can these thieves grab people’s money and run?
In real estate transactions, the escrow agent, title company, or attorney receive your money and then pay you off later, once the loan is complete. So, money travels back and forth between your account and one of these entities.
During this time, you and an agent will share bank and wire instructions.
This is where a thief likes to get involved.
They’ll find a way to hack into a communication system and add information that looks like it’s coming from someone involved, be it the closing agent, realtor, borrower, etc. Their goal is to convince you that the wire instructions changed.
With this change, the thief asks you to wire the funds to a different account. They usually also ask you to wire funds sooner than agreed upon. Why? Because they need the extra time to make sure the money is moved through the banking system before closing…and before you can get it back.
All of this might happen to you via email, text, or a phone call.
Thieves are tricky. They will find a way to break into a stream of email or text communication and make it look like the communication is coming from the same source.
What can you do?
Get on the phone and verify wire instructions.
It doesn’t matter if the instructions were sent through a super high-level security system (ex: encrypted email). A hacker can find a way around those. You shouldn’t even trust the phone numbers listed on a closing agent’s email. Take a few minutes to go online and look your agent’s phone number up. Make sure they match.
It all comes down to doing your due diligence. With every wire, call and verbally verify with the correctagent the instructions you’re supposed to use. Walk through each item and verify:
Bank name
Account name
Account number
ABA or routing number
The agent’s file name or number
NEVER accept last minute changes to wire instructions.
ALWAYS verify instructions before you send or receive a wire.
When you receive a wire, demand that the person sending you money verbally verifies the information with you and only you.
This alone can save you and your life savings.
Let’s take a look at some real-life examples.
Note: Do not solely rely on these examples as the only way thieves will try to steal your money. Although I’ll attempt to give you as many examples as possible throughout this booklet, I cannot possibly know them all. So, always get to know who is handling your transactions and ask them the best practices to keep your money safe.
The following happened to two lenders I know personally. One of them lost a couple hundred thousand dollars, and the other saved his funds at the last minute.
Let’s call the first lender Bob.
Bob had an arrangement with his bank to simply wire funds when they received a fax from him. Somehow a thief broke into Bob’s system and found his form for faxing wire requests. The thief created their own request and had funds wired to them out of the country before Bob could find out.
The bank was not responsible. Bob was.
So, he lost it all.
Now, let’s call the second lender Joe.
Joe had someone hack into his email, clone a message, and change the wire instructions. What do I mean by “cloning”? Well, let’s say Joe’s email was Joe@TheNoteShop.com. The thief went in and created a similar email address that most people would not notice, like Joe@TheNoteShops.com. By adding one letter (s) at the end of the address, the thief changed the email. Again, most people would not notice the change and thieves can quietly sneak by.
That’s what happened to Joe. Someone changed the wire instructions by creating a similar email address. The wire was readied to go out, but—thankfully—someone noticed the name on the account looked wrong. So, they did a verbal verification as a safety precaution.
Joe’s money was saved.
Here’s another example I recently read about:
A property in Colorado did not close because the money to purchase was diverted by a text message. The person received a text that they thought came from the realtor involved in the transaction. The text asked them to wire their funds a day early to a new account. On the day of closing, they realized they’d been scammed, and the money was gone.
So, as you can see, there many reasons why emails from closing agents warn of wire fraud.
Private real estate notes (aka, loans) are basic IOU’s from a borrower secured by a piece of real estate. So, instead of going to a bank for loan, a real estate investor (aka, borrower) will come to you.
You can lend the borrower all or some of the money they need to buy a property.
Just like they would a bank, a borrower pays you monthly interest.
Once the project is completed, the note is paid in full. “In full” means the borrower pays you back the full amount of the loan PLUS interest.
Congratulations! You just made more money in a safer way and in a shorter timeframe than you would’ve in the rocky stock market or other traditional methods (i.e. bonds, CDs, annuities).
Now, let’s dig in a little deeper…
Private real estate notes (or loans) are basic IOU’s from a borrower secured by a piece of real estate. They’re similar to the mortgage you have on your home…only now you’re the lender and receive the interest payments.
However, unlike your typical mortgage company, these loans come with better returns, more security, and the added bonus of making a positive impact on your community.
A proper private real estate note is secured against a property with a lien called a mortgage or deed of trust (depending on what state you’re located in).
So, instead of the borrower going to a bank for a loan, they come to you. You lend them the money and you receive the payments.
The difference here is you cut out the middleman who takes most of the profit: the
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