1. Understand The Story
Every borrower has a story to tell if they are looking for a private mortgage. If they didn’t have a story they would be dealing with a bank. You need to listen to their story and determine if it makes sense. Does it pass the smell test? What problem are they trying to solve and will your mortgage solve their problem or just prolong their misery?
2. Know The Exit Strategy
How is this mortgage going to be repaid? Are they relying on hopium or is there a clear plan to pay you out at maturity? If their exit strategy is to refinance with a bank or other institutional lender in a year, is that a realistic possibility? Where will the real estate market be at maturity? Do you have a big enough equity cushion to sell the property without a loss?
3. Avoid Rush Closings
No one suddenly needs a mortgage in 24 to 48 hours. Inevitably, a deal that needs a rush closing is fraught with incompetence, misrepresentation, or fraud. Maybe the borrowers failed to disclose key information or maybe they were just sticking their head in the sand trying to avoid dealing with their problem? Maybe fraudulent documentation was discovered? Maybe there were hidden issues with the security? These types of files require a deep dive to determine the true risk involved in the deal and should never be considered by novice private mortgage investors. If a deal starts as a headache, it will likely continue to be one.
4. Know The Real Estate
The real estate is your security. It’s what you are relying on to pay you back if the borrower defaults on the private mortgage. You need to fully understand how marketable the property is. Is the property well maintained? Are there tenants? Is it in a desirable area? Could the property easily sell in 60-90 days? Don’t be afraid to drive by the property to get a better feel for its curb appeal and that of its immediate neighbours. Real estate is local so be sure you understand the nuances of your security!
5. Mitigate Your Risks
Avoid going behind large first mortgages. They will quickly eat into your equity if they go into default. Avoid lending behind other private mortgages. The fees that private lenders charge upon default can be substantial and can quickly erode your equity position. Properties with tenants can be more difficult to sell. Anything that delays a sale when the mortgage is in default will erode your equity position.
Reach out to Andy if you would like to discuss investing in private mortgages.
Call or text Andy at: 289-400-3420 or email him at: <http://www.privatedaddy.com/?q=aGoCXEpECH9lK2hARV05GR9eaXhcRHUxSQ-3D-3D_19>.
Lessons From My Father: Timeless Wisdom for Private Mortgage Investors
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