Private Lending Report

Your Guide To Private Lending!

Table of Contents
Item #1: Your LTV should be a maximum of 70% 6
Item #2: Loan Review and Monitoring 7
Item #3: Title Insurance 7
Item #4: Close with a Professional 9
Item #5: An Appraisal 9
Item #6: Fire Insurance 11
Item #7: Set Up with a Mortgage Collection Agency 12
Item #8: Termite Report 12
Item #9: Zoning 13
Item #10: Always Have the Borrower Sign Personally 13
Item #11: Your Rights in Case of Default 14
Item #12: Weird and Commercial Properties 14
Item #13: Repairs 15
Item #14: Second Mortgages 16
Item #15: Never Make Out a Check Directly to the Borrower 16
Item #16: Payoff Letter 16
Item #17: Late Penalties and Collection Clause 17
Item #18: Assignments of Rents 17
Item #19: Default Steps 17
Item #20: Lead Paint 18
Item #21: Title Search 18
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“Everything you need to know
about lending out your own money”

“How to avoid minefields and eliminate
any chance of failure”

When it comes to lending your money on a real estate transaction, there are important items that you absolutely must require with respect to your transaction, in order to be profitable, successful and for you investment safe. This report covers 21 essential items that you must require to be profitable and successful. This report covers the items in detail.

Item #1: Your LTV should be a maximum of 70%

The Loan-To-Value (LTV) Ratio is the ratio of money that is borrowed to fair market value. Residential mortgage loans from banks traditionally have a maximum LTV of 80% (for example, an $80,000 loan on a $100,000 home). But when lending your personal funds, the LTV must be tighter to protect your investment.

You should aim for a 65% LTV and never exceed 70%, especially on low-end properties, which will be explained shortly. A high LTV loan creates a large amount of risk with little or no profit due to over-leveraging the property such as:

 Increased default risk and losses (The real estate investor could simply walk away from the property and pocket the “profit” and unused funds.)

 Inadequate Collateral
 Longer Term and/or Longer Exposure
 Limited Default Remedies

To maximize your success, you must maintain a reasonable risk factor, and you will need to require a maximum LTV limit of 70%.

Item #2: Loan Review and Monitoring

To be certain that your loans are secure and to perfect future transactions, you should perform a periodic quality analysis for the purpose of reviewing and monitoring the loan, as well as your overall portfolio.

The best overall monitoring of your loan is to validate that the work that the real estate investor agreed to do on the property is completed as agreed. There are two ways to accomplish this.

1. Perform a visual inspection of the property in person.

2. You can have an appraiser do it for you and have the real estate investor pay for it.

The typical way this is handled is at closing. It should be required that the original appraiser visit the property two more times—once halfway through the project prior to any escrowed funds being released and again at the end of the project when the balance of the funds is to be released.

Item #3: Title Insurance

Upon completion by the title insurance company of a title search, it will then issue title insurance, guaranteeing that no errors were made in the title search and that there are not errors in the public records. Title insurance also protects against undisclosed title defects, that, no matter how thorough, extensive, and exacting a search is made, it is still possible that hidden risks remain. Title insurance potentially could protect you against title problems that may subsequently surface, as some of these defects may not appear until many months or years after a property is sold. The end result could be the loss of the property, expensive lawsuits, and delayed closings. Public records that have been searched may not reflect the following:



• Forged signatures, fraud, or duress in obtaining signatures
• False impersonation
• Instruments executed under expired, revoked, or false powers of attorney
• Delivery of a conveyance after the death of a grantor
• Homestead rights of a spouse
• Undisclosed heirs and improperly probated wills
• Deeds by minors or persons of unsound mind
• Deeds by a corporation without proper legal authority
• Misrepresentation of marital status
• Clerical errors in recording legal documents
• Survey errors
• Mistaken interpretation of wills and trusts

An insured title protects against an attack on the title of the rights of the insured. Title insurance ensures that you have a marketable title to the property and if any problems are found, the insurance company will pay all costs. Any loss as a result of the above defects is paid up to the limits defined in the title policy.

A one-time premium is paid for this insurance, transferring the risk to the insurance company so that the real estate is as it is stated to be in the policy. This is important since the title insurance policy is what indemnifies the buyer and/or the lender against losses that may be incurred if the title of the property is not what is stated by the policy. Your real estate investor pays for this coverage for you.

Title insurance is not a title search. It is the title insurance that “insures” that that all searches with regard to the property are accurate.

There are two types of title insurance:

1. Owner’s Coverage. This protects the property owner from defects in title that could affect the property’s marketability.

2. Lender’s Coverage. This type of coverage insures you, the lender, against defects to the title. In case you become the owner of the property due to a foreclosure upon the loan, this will protect you. The closing agent should physically make you a lender’s policy within 3 weeks of the closing.

Title insurance is a protection in case inaccuracies should occur involving the title and what is stated on the policy. It provides both the purchaser and you, the lender, with comprehensive, no-fault protection against the risks which are inherent to real estate dealings.

The advantages to you when the real estate investor purchases title insurance include:

• No-fault recovery of losses;
• The payment of all related claim costs;
• Broad coverage including title defects resulting from negligence of the lawyer;
• A reasonable one-time premium;
• Flexibility to arrange special program coverage not available elsewhere in the market.

You will receive coverage for the validity and enforceability of your security investment.

Item #4: Close with a Professional

Closing with a professional will not cost you anything, as the borrower bears the cost of this service. It will give you invaluable peace of mind because you will be assured that the required documents are properly recorded. With the assistance of a professional, the risk of the transaction has been reduced immeasurably, increasing your potential for a successful, profitable deal.
Item #5: An Appraisal

A professional appraisal should be required of all of your real estate investors before you agree to lend to them. An appraisal is a written estimate of the fair market value of a property made by a qualified appraiser, based upon available facts and a thorough inspection of the property being purchased. There are many reasons for this, and it is up to the borrower to have this appraisal completed. It is completely free for you.

By having an appraisal done, you’ll have access to essential facts with regard to the property, as evidenced or disclosed in the appraisal. The facts will make both you and the real estate investor well-equipped to handle the investment.

In some states, a real property appraisal must be performed by an individual who is licensed or certified by the state. An appraisal report includes the following: interior and exterior inspection of the house (foundation, basement, structure, walls, roof, etc.) neighborhood and property site, marketing time in the area for similar properties, property profile (number of bedrooms and bathrooms), price and activity levels, property improvements, and sales comparison analysis.

The appraisal should be an “after-repaired” appraisal; which notes:

• The rehab work that must be performed on the property.
• The borrower must supply the appraiser the list of the repairs prior to the appraisal that will be done.

• The appraiser should then note any major items that have not been included on the real estate investor’s list.

In addition, an appraisal will forewarn you both of any potential issues and validate the loan-to-value ratio described above. The appraisal in essence serves to protect you by ensuring that you are not lending more money than the fair market value of the secured real property.


In many states, a mortgage broker is required by law to have an appraisal of the property within the file - or at minimum, a waiver that is signed by the lender. There is a reason for this law. Signing a waiver is a large risk, and you should not do one. You should insist upon an appraisal for every property.

Item #6: Fire Insurance

Fire insurance should be considered absolutely necessary for real estate transactions. In general, a fire insurance policy will protect you in the event of loss or damage to the property if it was a result of some (or all) of the following events:

 Fire
 Lightning
 Explosion
 Earthquake
 Impact
 Collision
 Riot
 Theft and malicious acts
 Subsidence

Fire insurance will normally cover a number of elements of your property, including:

 Kitchen fittings and appliances
 Outbuildings
 Garages
 Paths
 Fences and gates
 Site clearance
 Swimming pools (which includes the equipment for heating and filtration)
 Fees for architects, engineers, and/or surveyors

A loan should never be closed without fire insurance, and a 6-month premium should be paid at closing time.

You are listed on the insurance policy as the mortgagee. Both you and the real estate investor set 1098 @ EOY. Should the insurance expire, you may force the activation of insurance, maintain the coverage, and charge the real estate investor. The only way that you could lose is if the property burns down and you haven’t any insurance.

Item #7: Set Up with a Mortgage Collection Agency

Locating and signing up with a collection agency is easy and free to you. The mortgage collection company is responsible to see if the insurance is valid.

Item #8: Termite Report

It is highly recommended that you insist upon a termite report before you agree to the loan; in fact, in some states, this is mandatory. Note though, that just because the termite report indicates the presence of termites, it does not mean that the property will not be purchased. More often than not, it is possible for the seller to remedy the problem within a reasonable amount of time.

Termites make their home underground and survive by eating wood from the inside out. To the untrained eye, it may not always be obvious that there is termite damage, especially if it is a relatively new problem. Only a professional inspection is capable of determining whether there are termites in any of the buildings.

The longer the termites have been in a building, the more damage that may have been caused, and the more time and money that will have to be spent for repairs. Even if there is no apparent evidence of a termite infestation, a termite report should be absolutely necessary.

Having a termite report performed is doing your borrower a large favor, as you protected them from a great deal of hassle, damage, and future cost.

Item #9: Zoning

If you are making a loan for a single-family dwelling, you should make very certain that the zoning is for that purpose and not for a commercial area. Should the zoning be for a commercial property, it will not be possible for the borrower to obtain refinancing.

If the buyer is insistent upon the purchase of the property for residential use, it is up to him or her to make an application to the municipality to have the zoning changed. While this is a large and frequently expensive effort, this is what is required if efforts are to continue for this property and for that purpose.

You should require this of your real estate investor before even considering lending to them.

Item #10: Always Have the Borrower Sign Personally

When making a loan, you should always have the borrower sign personally on the promissory note. In addition, you will also want to include the signature of the trustee, if the property is in a trust.

There are many ways to take title to a property. The owner can take title personally or they could take title by an entity such as a corporation or LLC. They could form a Trust (sometimes called a land trust) and hire a Trustee.

The owner will be named on the deed. You, the lender, will get a mortgage where the “owner” of the property has agreed to allow you to record a mortgage on the property. This mortgage is a lien against the property and gives you the right to own the property in case of default by the owner.

The promissory note states the terms of this loan and how you are to be paid back. It should always have the real estate investor’s personal signature on it along with whoever is on the deed.

In the end, it is simply a matter of saving time and a lot of hassle to simply insist that it be the borrower him or herself who signs the promissory note and/or any contracts.

Item #11: Your Rights in Case of Default

You have a number of rights if your borrower stops paying. Your rights are as follows:

 Accelerate payment on the loan;
 Take the property;
 Go after the borrower personally.
In some states, before you can take possession of the property or go after the borrower personally, you must provide proof that you have made a demand for payment, and that you satisfied the requirements of the state in collecting on a loan.

The importance of hiring an attorney once the borrower has missed a payment must not be overlooked. This will ensure that your foreclosure proceedings are according to state law.

Any fees that may be incurred as a result of the default or late payment must be paid by the borrower in order to reinstate the loan. This must be stated specifically in the promissory note, so that there is no question on the validity of the fees should there be litigation.

Item #12: Weird and Commercial Properties

The wisest choice for you to make when it comes to loaning money on real estate is to avoid loaning on weird properties, new land, commercial properties, or on properties where there may be potential or known environmental issues.

The only exception can be if the LTV is very low - at approximately 50% or less - and if you have a very secure feeling that you simply can’t lose. Make this a very logic-based choice, and don’t let your emotions or “gut” feeling get in the way.

Create a policy never to loan for any property that you would not wish to take back for what you have invested in it. You will need to feel that the property is “worth it.” It might seem as though it’s a diamond in the rough…but you’d better be sure you’re not pouring all of your money into cubic zirconia.

Item #13: Repairs

When it comes to repairs that need to be made on the property, it is in your best interest as the lender to be certain that the money allocated for repairs is used for repairs.

Do not let the borrower hold the repair money, trusting that the repairs will get done. It is not a financially sound practice. It is a risky assumption when your money is at stake.

Have the attorney, escrow agent, or title company hold the money in escrow and have them prepare an escrow agreement to be signed by the appropriate parties. The escrow money for the repairs should be released as follows:

• 1st Release - 1/3 of repair funds at the time of closing so the real estate investor can get started.

• 2nd Release - 1/3 of repair funds halfway through the project to pay for labor. There should be an agreement as to what this point will be.

• 3rd and final release - 1/3 of the funds when the repairs to the property are completed.

Make sure your appraiser approves the 2nd and 3rd releases.

Note: If you’re ever in doubt as to whether or not the escrow amount is enough to cover repairs, ask the borrower to get an estimate from a contractor and match the items in the estimate to the items on the appraisal.

Item #14: Second Mortgages

Make certain that you are not making a second mortgage behind a first mortgage, without having verification that the first mortgage is still current, or will be brought to being current at the closing. There should be no short term balloons on the first mortgage that could possibly jeopardize your position.

Item #15: Never Make Out a Check Directly to the Borrower

In order to be certain that the funds disbursed at closing go exactly as stated in the settlement statement, you should never make out a check directly to the borrower. Instead:

• Your check should be made directly to the closing or escrow agent.
• The closing or escrow agent will disburse funds at closing and hold escrowed funds.
• The lender must not bear any expense.
• Your only expense is getting the check to the closing agent.

Item #16: Payoff Letter

It is a very sound idea to let your collection company or your attorney produce a payoff letter when it is requested by you. It is then their responsibility to complete it correctly.

If your attorney does this, you may also assign him or her the task of producing a satisfaction of mortgage if the borrower’s closing agent is not doing so. Remember that any fee incurred by your attorney regarding this loan should be paid by the borrower.

Item #17: Late Penalties and Collection Clause

As the lender, it is well within your rights to charge a higher-than-normal late penalty to make your buyer pay the monthly fee and the set-up fee for your monthly payment.

If the proper language is not included within the note, you may not have these rights. Therefore, be certain that your closing agent includes this information within the note.

Item #18: Assignments of Rents

All closing agents can prepare an “assignment of rents” that may be signed by the borrower with little to no extra cost to the borrower. An “assignment of rents” allows you, rather than the borrower, to collect any applicable rents when due directly in case of default.

Even though the mortgage provides for collecting rent while in foreclosure, it is a good policy to have a separate agreement clarifying the terms.

Item #19: Default Steps

Should your borrower fall behind in his or her payment by 30 days and has not made any arrangement for doing so, turn the account and its situation over to your attorney to take action. This allows you to be certain that the most beneficial and legal actions will be taken for all delinquent accounts.

Any fees that may be incurred will be paid by the borrower to re-instate. It is always better to take action sooner rather than later. You gain nothing by waiting.

The above list is a good foundation for the creation of the right mindset, attitudes, and policies for maximizing your profit potential when lending in a real estate situation.

Item #20: Lead Paint

Require that the lender call the Health Department and make sure that the house has not been cited for lead paint. If it has, DO NOT LOAN money on that house! Lead paint in a home that has not been remedied is an environmental and health hazard.

In order to sell the home, that information will always need to be disclosed and that could make it nearly impossible to sell.

Item #21: Title Search

Make sure there is a clear title. A title search is the physical research of the recorded title at the county court house disclosing the following types of information:

• Liens on the property.
• Encumbrances and their priority.
• Legal services provided by the lawyer with respect to the insured property.