Questions to Ask Before You Become a Private Lender
A checklist covering the borrower, the security, the money, the exit and the paperwork. Working through it is the most useful hour you can spend.
Key Financial Group
The short version: Ask who is borrowing, what secures the loan, where your money goes in transit, what happens if you need out early, and what you get in writing. Slow answers and vague answers are both information.
Why a list helps
Private lending is not complicated, and it is unfamiliar. Unfamiliarity is what makes people rely on how a conversation felt rather than on what was actually established.
A written list fixes that. You are not required to become an expert. You are required to ask specific questions and to notice how they are answered.
About the borrower
Who exactly am I lending to? The legal entity name, not a brand or a person.
How long have they operated, and through what conditions? An operator that has been through a difficult property market has evidence a newer one cannot have.
What is their business? Under the Private Lending program the borrower is an established residential real estate developer with more than twenty years of operating history. Ask what its work covers and how it has fared through different property markets.
Where does the interest come from? Under the program, from all of the developer's income sources rather than only the property securing your note, and payment is backed by a promissory note.
Have they ever missed or reduced a payment? Ask, listen, and treat any company's account of its own record as exactly that. Past performance does not indicate future results.
About the security
Which specific property secures my loan? You should be able to identify it.
Can I see the recorded instrument? A certified Deed of Trust and/or Mortgage Note. See how a Deed of Trust protects a private lender.
What lien position do I hold, and what is ahead of me? Under the program, position generally follows loan size: under one hundred thousand typically secondary, one hundred to two hundred thousand typically primary with one joint lien, above two hundred thousand typically sole primary. See understanding lien position.
What happens if that property is sold? Under this programme the note is transferred to another property.
Is the property insured, and against what? Ask what cover is in place. Property insurance covers physical loss, not a fall in market value.
About the money
Where does my money go on the way? Under the program, through third party escrow and title companies rather than directly to the developer. Ask for the names and verify them independently. See the role of third party escrow.
What is the minimum, and what term? Twenty five thousand dollars, terms of two to five years.
How and when is interest paid? Monthly, or deferred and compounded quarterly. See monthly interest vs compounding.
What is the rate? Current terms and rates are available on request rather than published.
Can retirement money be used? Yes, and it involves specific custodial requirements. See can you use your IRA or old 401(k).
About the exit
This is the section people skip and later wish they had not.
What if I need my money before the term ends? Under the program, early withdrawal is discouraged. In genuine hardship the note can typically be liquidated at a market discount, so you would receive less than you lent.
What happens at the end of the term? Renew or exit, and the rate at renewal reflects conditions then.
What happens if I die during the term? Ask how the note is handled and what your family would need to do. It is an uncomfortable question and a necessary one.
About the paperwork
What will I receive, and can I keep copies? A promissory note, the security instrument, and escrow confirmation at minimum.
Can my attorney review it before I sign? The answer should be an immediate yes.
Is anything here dependent on a verbal assurance? If so, get it in writing or treat it as absent.
About the fit with the rest of your plan
Two questions that have nothing to do with the programme and everything to do with you.
Would an adverse outcome change my circumstances? Not whether it would be unwelcome, but whether it would alter how you live. If the honest answer is yes, the amount is too large regardless of how good the arrangement looks.
Have I covered the liquid and insured layers first? An emergency reserve you can reach today, and the money you expect to spend over the next few years, both belong in insured accounts before anything illiquid is considered. We set that out in building a safe money bucket for the next five years.
Most of the retirees we work with hold the large majority of their savings in certificates of deposit, savings and money market accounts, and fixed annuities. Private lending, where it appears at all, is a portion rather than a foundation.
The risks, stated plainly
Whatever the answers, these remain true:
- Your funds are not liquid during the term.
- This is not a bank product and is not FDIC insured.
- Real estate values can change.
- Interest rates can change at renewal.
- Past performance does not indicate future results.
The test that matters most
Say this and watch what happens: "I would like to take these documents home, read them, and speak with my attorney before deciding."
A legitimate arrangement welcomes it. Anything that responds with urgency has answered a question you did not need to ask. We cover the wider patterns in how to vet any financial professional.
If you would like to work through this list together, with the documents in front of us, schedule a free consultation. We would rather you decline having understood it than proceed having been reassured.
This article is for general education and is not financial, tax, or legal advice. Please speak with a licensed professional about your situation.
