Episode 8: Mastering Private Money Lending: Key Insights for Real Estate Investors

Join us on this episode of the Investor Evolution Podcast as we dive deep into the world of private money lending from multiple perspectives: borrower, lender, and connector. Our host shares valuable insights from a recent virtual mastermind event with Alexis Morgan and Abraham Gray. Learn the essential roles and responsibilities for private money lenders, including how to vet deals and borrowers, and understand the critical documentation needed. Discover tips for borrowers on securing funds and effectively communicating with lenders. Additionally, explore the crucial role of connectors in facilitating smooth transactions. Whether you're new to real estate investing or a seasoned pro, this episode is packed with practical advice to help you navigate private money lending successfully.

00:00 Welcome to the Investor Evolution Podcast
00:24 Key Takeaways from the Private Money Lending Mastermind
00:55 Deep Dive into Private Money Lending: Lender's Perspective
03:06 Vetting the Borrower: A Lender's Guide
11:50 The Borrower's Perspective: Preparing for Scrutiny
17:57 The Role of Connectors in Real Estate Deals
25:16 Closing Thoughts and Next Steps

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Transcript

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Whether you're just starting out in real estate investing or already making strides. The investor evolution podcast is tailored for you. Come along as we tackle these questions directly. And deliver practical insights. to empower your journey in the realm of real estate investing. Hey, everyone. Welcome back to the investor evolution podcast. I'm excited to be here with you this week. This past weekend, I attended a virtual private money lending mastermind with Alexis Morgan and Abraham gray. And I wanted to share with you some of my takeaways. From that event. And how it relates to private money lenders. In three different ways. So both from the borrower's perspective, the lender's perspective. And if there's a connector in the middle. What those rules really should look like. I want to start with the private money lender. So with the private money lender, their roles and responsibilities. R two. Find the deal that the deal maybe deals are being brought to them, but they need to know what their lend box is, what states they want to lend in. If there's certain. Timeframes. They want to lend for certain exit strategies that they are willing to lend for. So as a private money lender. Before you ever get started? I want you to sit down and think about what it is you want your money to do for you. Now you might have money in a self-directed IRA. And that money you can't touch anyway for a really long time. So maybe that money you're okay. Investing in, buy and holds. Or multifamily stuff. That might take two to seven years to exit. You might be perfectly fine with that because that money. Just needs to kind of sit and accumulate and build on its own. Right. But you might have. Let's say a heat lock that you're going to use money from, or some other line of credit, a business line of credit. Or maybe you just have. Some rainy day funds sitting in a savings account, earning less than 1%. And you're like, maybe I should do something more with that, whatever it may be. Those funds. You might say. I want it to work for me, so I don't want it to be a long-term lens. Maybe I want it to be. Less than a year. Maybe I want it to be less than six months. Maybe I want it to be 60 days, whatever that might be. I want you to think of the timeframe where those monies are coming from. How soon you need to pay them back. If you're borrowing from a line of credit. Or what you really want that money to do for you? For a lot of people fix and flips could be a great option because usually it's six months or less. And if they can turn their money over to three, possibly even four times a year, And continue to build those funds. Right. They're going to do a lot for you in that year as far as, as a lender, once you get a deal, whether that's a connector that brought it to you or the borrower came straight to you. There's a couple of things that need to happen. You need to vet the deal and you also need to vet the borrower. And if you've lent with someone over and over and over again, and you have a great rapport. Then you're heavily vetting that deal. If you've never worked with this borrower before. Yeah, the deal is important, but so is that borrower and really making sure that you're vetting that borrower is very key to making sure you're secure. Now, if there's a lot of equity in that property, And. If the borrower doesn't perform, you know, you're safe because you have a lot of equity, especially if you're in first position. If you're a lending and second position. Then it really does depend on that borrower. Now. Uh, things that can be helpful for you to vet the borrower. you want to get as much information from them as you possibly can about their. Prior experience. So I would for sure get on a zoom or on a phone call with that person. Just say, Hey, tell, tell me a little bit about yourself. Tell me what you've been doing. Now, this person may be super experienced. I flip. You know, 12 houses a year. I have different crews running, you know, whatever that might be, could be very experienced or they could be brand new now just because they're brand new doesn't mean they're a bad borrower. Maybe they say. I am brand new. However, I am partnering with someone, so, and he's done, you know, seven. Deals in the last year. That's a great place to be because you have the experience of the other guy. Or gal, and then you can help that. New borrower. If the deal's right. Get his feet wet or hit her feet wet. In the process and let them start gaining their experience now. That is not your job. To give them money so that they can get their experience. They do have to have a good deal. Right. But getting to know the borrower. Is really important. Maybe you don't get along with that person. Maybe there's just something that you're like, I don't really vibe with you. Don't lend to them. It's okay. If, if there's someone that you're like, I totally clicked with you, like let's do business together. That's a great feeling, right. But if you have any hesitations, you know, check yourself and figure out why you may have hesitations. And work through that before you lend tens of hundreds of thousands of dollars, right? Another important thing. At they say, Hey, yeah, I flipped a ton of houses. Like I did 12 last year. Awesome. Great. Give me her last three. HUD's from buying those properties and selling those properties. So I can see your track record. You want to make sure they are making money? You want to make sure they are. You know, they can back up what they say they're doing. So if they're like, I don't, I don't know. I can't get you those HUDS okay. That's fine. I can't get you that money and no problem. You know, But if they're reputable, if they're able to show you everything. And it's not a bad idea to ask. Tell me the last project that you did. What, what went well? What went wrong? Did you have any issues? You know, is there a project that you've had that you haven't been able to, to pay back lenders or that you were a late on. Because if they're going to say actually we had a deal in Mississippi and there was a cyber attack on the county. And I couldn't pay back my lenders for 23 days because the county couldn't. Close because we couldn't file the paperwork. And so my, my, my lenders. I paid them back late, but I paid them back there late fee. Is everyone got paid out? And here are the references for those people that they could talk to. Like this happened to me as a lender. And, I was in that situation, my money was late because of a cyber attack. It was crazy. If you're a borrower is willing to tell you that upfront and say, Hey, this is the situation. This is what happened. You know, but I was able to pay them back and I was able to pay them the late fees and everything worked out because I made sure there was enough equity in the deal. For them that it all worked out. I would make sure you ask for lenders. Or ask for references, maybe it's not lenders, but you want to talk to people who know this person so that you can see. What type of person are they, are they integrous? Are they honest? Do they. Are they a go giver, whatever it may be that you're looking forward to. To make yourself feel like, okay, this is a borrower. I can get on board with and lend money to. If they're resistant to giving you that information. Then perhaps they're not. a borrower that you want to lend to. A lot of people will run credit checks. And background checks on people. They ask about, have you had any foreclosures, have you had any. Bankruptcies. In the past. You know, if we do. Uh, background check, what would we find? And if they're upfront and honest and can tell you about some stuff, Hey, I did. Have this. Bankruptcy because my previous partner didn't file the taxes that I thought they were filing on the business and they left the business. They, it was all left to me. I have, made. Arrangements with the IRS to pay it back. Here are the things that I've done to do that. If they can tell you those things. Upfront, and they're not bothered by it. They don't seem shady about it. They are not trying to hide anything. Then that might be someone that you are comfortable lending with, but definitely talk to references. Background checks, credit checks are important, just so you know what their credit looks like and their history, right? History of paying people back is highly important. Now, the next thing you do want to do is. Vet the deal. Of course. So you're going to underwrite that however you do your underwriting. You look for comps and you see what this property could be worth. If. Everything went wrong. Right. Like as is value. If nothing happened, what is the fire? They call it the fire sale price. Like if it had to go to auction, what is that price? That would be the rock bottom price that this property would sell for. And then you figure out your equation from there. So a lot of times people will take that rock bottom price. Maybe it's, I'm going to do a hundred thousand dollars. So I can do math quickly, a hundred thousand dollars. Okay. You're going to lend 70% of that. So we're at 70,000. Now, maybe we're going to take off. Some for fees and interest. Uh, just in case there were to be a problem. So maybe you're going to lend 60, 65,000 on that house. Maybe a little bit less. Now, if it's someone you've lent with frequently and you know, their track record, maybe you're comfortable loading 70. Thousand dollars. Maybe you're comfortable lending 75. You know, you have to find that comfort level, but it's okay to say, like, this is what I'm willing to lend. Here are my terms. You know, and if, if that's something that they're willing to work with. Great. And if not, then that's okay too. There will be another deal. So just because you've looked at a deal, doesn't mean it's your deal. Okay. So don't feel like you have to lend on something. If you're uncomfortable about it. I was talking with Justin Barber. Connecting with him. And one of the things that one of his mentors told him was a deal is always a no until you can't find a reason not to. I think this can be really an important way to go into it. So you don't get emotionally invested for those of us who are kind of emotional buyers. Talking to myself here. That when you are looking at a deal, if you're starting to see things that are like, huh, that's just not right. Huh? I don't really understand that. Hmm. You know, if you're having those things pop up. Let it go. Let it go. You need to vet the borrower. And you need to vet the deal. Now let's talk about the borrower. So as a borrower, if you are seeking money, From a private money lender. And they're asking you questions about your history, what you have done. What. Liabilities, you might have. What you're. Liquidity is. You know what your skin in the game is, what your past credit history is, bankruptcy history, any lawsuits against you, and that's making you uncomfortable. And you're like, why are they digging into my business? Well, because you're asking them for hundreds of thousands of dollars and we need to know that you're credible. Okay, so be gracious and answer those questions. Openly honestly. If it seems like there's something to hide. That can be difficult for a lender to want to lend to you. As far as being open and honest, we all understand that nothing goes a hundred percent well. in a real estate transaction, there's always something along the way. Maybe it's the water heater blew out in the midst of your renovation and you weren't anticipating that cost maybe. You didn't realize that the foundation had some issues. And now we have to worry about that. Maybe it's the market changed? And in between your flip and. We're maybe looking at a less ARV than we anticipated. Whatever it is. Or maybe even before you even close, the title report comes back and there's$200,000 of liens on the house that you are not anticipating. There's always something. When you're asking other people for money. They are really. the one in control. Right. They're the ones in control and it is your job to put them at ease, to give them all the information they need to make a decision. To lend or not to land. And if you're not giving them references, if you're not being straightforward with your past. Uh, you know, maybe you had a bad deal. Maybe you weren't able to pay your lenders back. What did you do to remedy that situation? How did you communicate with that lender? When things were hitting the fan, right. That even when things go bad, if you show that you were communicating that you were doing everything in your power to make the situation right. And to make that lender whole, that goes a very long way. Okay. And if there isn't a lot of room in your deal. For the lenders to feel safe and secure, then. Just know that that might be a harder ask and you're going to need an investor who is a lot riskier. To go in on your deals, which may mean you're going to pay more for that money. And you just need to be okay with that. They may ask you those lenders may ask you. You know, do you have a W2? What is, your experience? How long have you been doing this? And again, they'll ask for references. They may ask you for your driver's license and you're like, why do you need my driver's license? Yeah. Because they're going to run a credit check on you. And they may do a background check on you. For those of us in the pace Morby world and have done our safety semester we all know about Mel Palmer and her. Vetting system that she does now. And for, if you're doing a lot of deals in this community, And you're wanting to show that, Hey, look, I am. Integrous I've done lots of business. And I want to show you guys that, I'm a good borrower and you go through her vetting service. I think that would go a long way. It does cost money. But if you're doing a lot of deals and especially within our community, And you can say, yep. Mel Palmer vetted me. Here's my background. Check through her. That's going to go a long way as well. So that might be something to think about as a borrower. Okay. Another thing that lenders will probably ask, and I didn't touch on this with the lenders side of things, but they may ask, you know, okay, what's the purchase price. If they're in second lien position, they should be asking who's in front of them. They should be getting contact information for who's in front of them on that lien. And, um, how much that first position owes, because that's gonna determine how much they can lend because of the amount of equity, unless you can cross collateralize, then that's a different conversation, but they may be asking you like, what's your exit strategy? What's your timeline? What happens if you can't sell in that time? You know, what's your secondary exit strategy. You should have multiple ways that. You could exit this property in order to pay your lenders back. So maybe it is selling on the MLS. Maybe it's refinancing. Maybe it's getting another PML to come in and refinance. That first PML out. If it's at the six month mark or whatever their term is. And you might talk about like the contractors I use, I've used this many times here's their name? And here's some references. Here's other lenders who have worked with that same contractor on deals that I've done. So you're building this case history of. Yes, I am a good borrower and I will repay you. That's what the lender wants to know. Are you going to repay them? That's that's really what they want to know. So those would be things that as a borrower, You should be expected to be asked. And if you volunteer all that information, Oh, man, that lender's going to be like, this was easy. Great. I got all, I need to know if I want to lend on this deal. Another thing that you may offer as a personal guarantee. And in a second, we'll talk about the documentation that a PML should have with each deal. Now let's talk about. Connectors. Okay. So there's been lots of things with the connectors going on in the pace Morby world and a connector is not someone who just says, Hey, Bobby, guess who? I know, I know Susie. She has money. You have a deal. You guys should. Work together and that's all you do. That's not a connector. That's an introduction. So a connector is someone who gets a deal, perhaps from a borrower. Maybe they've already talked to a lender and know exactly what their buyer box is. And so they go out looking for a deal that would fit that buy box. However that deal comes to that connector could be any other of those ways. As, as you get that deal in as a connector, you should vet that deal. You need to look at the comps. You need to look at the exit strategy. Is what the, the borrower asking for reasonable. Is it risky? Is it a first lien position? Is it a second lien position? Are there going to be multiple lenders on there and they may be in third, fourth, fifth position. How is your lender going to be secured? You need to ask all those questions of the borrower also, especially if it's someone that you plan on working with. Again, maybe they have a pipeline of deals and they're looking for lenders and they've come to you and said, Hey, do you have a group of lenders who can, you know, come in and partner with me on these deals. Great. You should vet that bar over to you should ask for all that information. You should get a credit report. You should get a. Um, background check, because then you can say, Hey lender. These are the things that I've done. I've looked at the borrower. It's your job to confirm that. And reach out to these references that I've talked to also. So make sure you're getting a consistent story. Here's the deal. Here's how, what I see on this deal. Here's what I think about these exit strategies. Here's any. Concerns I might have. Ultimately lender, this is up to you to lend on it. I'm not lending on it. It is your decision. I'm happy to talk with you about it, but I'm not going to sway you in any way. I'm just presenting you with information that I have. Now the other thing as a connector that you should be doing is you're in this deal with the borrower. Through long haul until this gets paid back. As you guys, work in this connector space, you should have an agreement with the lender. Of what you're doing. I am sourcing the deals. I'm vetting the borrower. And presenting you with that information so that you can also do your vetting process. I'm looking at the deal for viability and presenting you with that information so that you can do your vetting process. And ensure that you are in agreement. And make sure there isn't any other information that you need. I will keep you posted as the deal progresses. And, we will be in this deal together. So as a connector, you don't want to leave those lenders high and dry, right? You want to be part of the deal with them in with them. So that they feel comfortable. And if there are issues, if they have questions, you can be that mediary and you can. Help facilitate communication. It was important for you to know what's going on as well. Right. And so when you are working with that borrower, and if anything is. Awry. What I would tell you is your job is to be that communication. If that borrower. Is clamming up and the communication is stopping. You need to encourage them to. Communicate with the lenders. What I've seen is the borrowers who. Our upfront and honest and say, Hey, this is what happened. Um, this is what I'm working on to remedy the situation. I wanted you to be aware. If you guys have any other ideas. Let me know, let's talk about it. Let's think about it and see how we can make this a win-win situation for us. Doesn't that sound so much better than crickets. And not knowing that something bad is going on until. Your money was due three days ago. Six weeks ago. And you're not getting it. And you have no idea what's going on. So that's another important thing for everybody in the deal. Everybody needs to be open to communication and you can set that up. In the beginning of how frequent is communication, what are you guys, expecting in regards to communication? Is it. Via email once a month until it's close to closing time on that, the terms of the deal. And then maybe it's more frequent. Is it phone calls? What does that look like? What do you want as a borrower and a lender? To, for that communication to look like. Right. So it's all about getting that information all upfront. And then as a lender, there's five things that you need when you close. Okay. You need. A. Promissory note. Which is the terms of the agreement. You need a security deed. Could be called a deed of trust or a mortgage, depending on the state. And that is the security for that promissory note. It's what. Kind of ties that into, uh, and puts you in a lien position. Okay. So those two things. Then you need a lender's title policy that should be paid for by the borrower and that lender's title policy. Protects you in case something comes up on that title after you guys have purchased it. That you didn't see beforehand that lender's title policy will cover it so that you guys are not responsible for it. So that's very important. You also want to make sure you're on the homeowner's insurance as a loss pay. So, for example, if they you're doing a fix and flip your. Having to replace the roof. And there was a massive rainstorm and there was flooding and ruined some of the drywall, you know, or if the house burned down, if you're a lost payee on that, you will be. Uh, reimbursed from that homeowner's insurance policy for what you lent. Okay, so that's important. And then that fifth one is that personal guarantee from the borrower. So those were the, the things that, uh, That this weekend were things that really became. Crystal clear to me of things. I need to be doing both as a PML. And as a connector. And who knows maybe one day as a borrower. We'll see. But right now those are the two realms that I'm working in. So it was a good reminder. Also learning experience because I did learn a lot of new things as well. This weekend. Alexis and Abraham are fantastic. They are so knowledgeable and so generous with their time. And it was a great event. So I really appreciated them. All right. So that wraps up today and our little recap of private money, lenders and borrowers and how we should all be interacting within that transaction. I hope this was helpful. Please reach out with your questions and your comments. Let me know if there's something that I missed or something that I need to clarify, and we will get that to you. All right, guys. Have a great one and we'll see you next time.