Private loans are not without risks. Private investors are not banks, and are less sensitive to headline risk and more willing to foreclose. Three things you can do to minimize the risk of loans from private money:
Don’t get a private money loans if you can’t afford it. Just because a private investor is willing to lend you the money, doesn’t mean you can afford to pay it back.
Conduct your own due diligence on the private investor, the servicer and the lender. Ask for references and speak with borrowers with whom the lender is now servicing or for whom the lender has packaged loans. When you are playing in the private money world, you need to be more careful than walking into a bank branch.
Watch out for balloons. You may be able to afford private loans, but you may not be in a position to pay the balloon payment at the time the private investor is expecting it. Missing a balloon payment in a private money transaction will enable the lender to more easily foreclose on your collateral.
You’ll need to know a few things to research the track record of the above parties:
- The name under which the lender services the loan and
- The name under which the loan is vested.
Research on the internet or at the county court house to see how many properties that lender, or investor has foreclosed upon. Avoid lenders with a large number of foreclosures. High foreclosure rates could signal unscrupulous lending practices or at least a very low threshold of patience for delinquent payments.