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Why Private Lending Deals are So Risky | By: Multiple Speaker(s)

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Why Private Lending Deals are So Risky
By Vena Jones-Cox

Because they involve PEOPLE, all real estate transactions involve some risk of litigation or prosecution. Landlords get sued over everything from discrimination to lead poisoning to personal injury to sexual harassment; even normal home sellers in normal transactions are dragged into court over undisclosed problems with properties.

Private lending deals, though, have a different kind of risk, and that’s the risk of interference or prosecution by regulatory enforcement agencies. In a quick search of the internet, I was able to find, in less than 2 minutes, four separate cases where real estate investors had been issued cease and desist orders, orders of restitution (ie, pay back all of your private lenders NOW), or, in one famous Toledo case, sent to jail and ordered to pay $15 million in damages.

Yes, my little chicklets, your state—and the Federal SEC, if you borrow money across state lines—believes that your private lending deals are their business. Yes, even if you’ve always made every payment. Yes, even though they’re “backed by deeds or deeds of trust”.

So let’s talk about what you actually need to be doing to avoid—or at least mitigate—the risk that regulators are going to get into your business. Because even if you’re doing everything right, such investigations are expensive for you, scary as all get-out, and a huge interruption to your business.

First and foremost, follow the law in regards to borrowing money. This means:

Register your loans as securities with the state, or get an exemption from registration from the SEC. In other words, tell the authorities what you’re doing—don’t let them discover it for themselves.
Evaluate your lenders/partners through a thorough investor questionnaire that allows you to determine that they are both sophisticated enough to understand what they’re investing in and liquid enough to afford to lose the investment. If either of those qualifications is NOT met, don’t take the money. Ever.
Prior allowing any lender to invest with you, have them sign a complete disclosure of all of the risks of the loan. A competent SEC attorney can create this disclosure document for you.
Never publicly solicit for money. Never use terms with your investors like “guaranteed returns”, “low-risk”, or “secure”. I don’t care what your competitors are saying. Don’t do it.
Disclose exactly what their money might be invested in, and invest it only in those things. Even with all of the above in place, if you tell an investor that their money will be going to buy and fix property “a”, and it actually goes partly into the rehab of property “b” (or worse yet, toward your credit card payment or a new car), you’re gonna be in trouble.
Secondly, know that many of the investigations by regulators are “complaint driven”. In other words, someone—often your lenders themselves—makes a quick call because a payment was missed, or because they want their money back 18 months into a deal that was to be a 5 year investment, or just because someone told them that they may have invested their money in a ponzi scheme, and they’re trying to check it out.

So YOUR behavior is crucial in avoiding such complaints. Which is why you should:

Have YOUR education in place. If you don’t know how to evaluate deals, rehab deals, rent properties, etc, don’t put other people’s money at risk in them, ever.
Only do deals that make sense. Don’t get into marginal deals where you can only pay the bills if everything goes 100% perfectly. If you wouldn’t put YOUR money in a deal, don’t put someone else’s money in it, either.
Don’t borrow money from people who are clearly “nervous Nellies”. When a potential investor has a million questions about “what if I need my money back earlier”, “what if the market drops another 20%”, “what if the carpet you put in is the wrong color” etc., they’re pretty much warning you that they don’t have the stomach for private lending, and will be a problem later. Investors SHOULD have questions about their own protection and safety, but if the very idea of the investment is clearly making them anxious, you don’t want them, no matter how much money they have. Trust me.
If things DO start to go south, don’t play ostrich. I’ve seen private lenders and partners forgive huge losses—when it’s communicated to them WHY the losses are taking place, how sorry the investor is, how the investor intends to salvage the situation in the best way possible and make up the difference as that becomes possible. I’ve seen homeowners take back properties without a problem when it became impossible for the investor to continue to make payments. I’ve also seen what happens when the investor “goes dark” on these same people—anger, threats, lawsuits, and unwanted interaction with regulatory bodies.
Stay in communication with lenders, even when everything is “going fine”. Let them know it’s going fine, and that you’re on track to do what you said you’d do.

Private lending is such a win-win when all the pieces are in place that it’s a no-brainer for you to pursue it. Just make sure you’re dotting all the “I”s and crossing all the “t”s when you do.

Reprinted with permission of Vena Jones-Cox. To get more free articles and tips, subscribe at

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