Top Ten Tips For Private Lending From Your IRA

Mike: Welcome back to the flipnerd.com REI classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Quincy: Hi, I am H. Quincy Long, President and Founder of Quest IRA, Inc. and we provide self-directed IRAs and today in the REI Classroom I’m going to be talking about top 10 tips for private lending out of your IRA or personally.
Mike: This REI classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Quincy: So my first step is do not loan on something you would not be excited to own if the borrower defaults. Because life happens and sometimes a borrower defaults and you have to take the property and if you would not be excited to own it, it’s probably not a very good loan for you to make.
My number two tip, generally do not advance money for repairs until the repairs are done and inspected because you can get into a property when you foreclose on it that hasn’t been repaired and I have had many clients that get into this mess.
My third tip and this is going to make you laugh probably, my third tip would be to do not loan to someone you would feel uncomfortable foreclosing on. Now, myself I wouldn’t feel comfortable foreclosing on my mother if I loaned her money and she wouldn’t pay it, but some people are not like that and I have seen lots of relationships destroyed over a loan that went bad. So if you treat it professionally, then the lenders foreclose if it doesn’t go right and if you’re not comfortable with that, it’s probably not a great borrower for you to loan money to.
Next, number four, if the loan goes into default, don’t delay, start taking action immediately. This should be obvious but you would be surprised at how many people delay. You can only stop a process such as foreclosure once you began it but you can’t finish it until you start it. So always keep that in mind–you can always stop it but you can’t finish it until you start it.
The next thing I would say, number five, would be to collect payments monthly. I have reasons for that. One for example, and the key one probably for me, is you want to borrow to feel the pain of the payment. I always want the borrower to have a reminder monthly that he’s got an obligation to pay on a house that he hasn’t filled in with a tenant or sold. Next, you need an easy way to tell if there’s a problem with the borrower and missing monthly payments is an easy way to tell.
Third, and I have to laugh at this one because I had a client that used to make loans for 18 months and he’d collect all the interest at the end. Well, the problem with that is that when the loan went into default because the guy disappeared, he couldn’t foreclose because there was no default on the loan. So you need a methodology for declaring a default.
Number six, if you’re not sure about how to evaluate a loan, hire one or more professionals to help you evaluate the deal. And follow the non-biblical version of the golden rule. I mean, everybody knows the biblical version of the golden rule. He who has the gold, makes the rules, right? That’s the non-biblical version, I’m sorry. The biblical version is, “Do unto others as you would have others do unto you,” but in this case, the real golden rule is, “He who has the gold, makes the rules.” So if your rule means that you have to hire an appraiser or an inspector and you simply pass that cost on to the borrower and if they don’t like your rules, they don’t have to borrow your gold.
The next tip, number seven is, insist on title insurance for the loan. Boy, I can go into long stories on this one, but just to give you one easy quick example. I had made a loan on a property which I ended up foreclosing on. Four days later after I made my loan, the guy went to a second title company and borrowed more money and they thought they had a first lien. The guy in fact got foreclosed on by me and had that second lender not had title insurance, they would’ve lost all of their money and there’s a lot more to that story, but it’s a real fun.
Next, number eight, verify that hazard, and if applicable, flood or wind storm coverage is on the property and that your IRA or your loan lender is named as an additional insured on the policy. This is pretty easy to miss and you want to make sure it’s part of your process to do that.
Number nine, insist on evidence that property tax and HOA dues are paid when they become due. I have extended loans in the past and those items were not, I didn’t say, “Hey, prove to me you’ve updated these items,” and I ended up when I foreclosed having a lot less equity than I thought because those were in still due.
Finally and I guess this is one of the more important ones, number 10 would be to due diligence not only on the property, which everybody kind of understands, but also do your due diligence on the borrower because the borrower can be people, a person that you shouldn’t trust and I had some experiences in that regard which I won’t go into in this class.
But anyway, that’s my top 10 tips for using private money. I am Quincy Long, President of Quest IRA, Inc. If you want more information, come to our website at www.questira.com. I look forward to seeing you on another version of REI classroom. Thank you.
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