Greetings from the laughingstock of the professional sports world – Houston, TX. And welcome to episode 121 of the Private Lender Podcast, I’m your host, Keith Baker and I’d like to thank you for sharing your time with me today.
If you’re looking for practical tips and advice on Private Lending and how to keep your money safe, then you are in the right place. But if you want to learn from my mistakes so you can both avoid and profit from them, well then pull up a chair and pour yourself a stiff drink my friend, because this podcast is just for you!
The PLP is dedicated to giving people just like you and me the knowledge and confidence to participate in the most passive form of real estate investing known to man: Private Lending.
And if you are looking for a shortcut to begin Private Lending then head over to PrivateLenderPodcast.com/ink to learn how you can put your money to work for you by investing in private and hard money loans around Houston.
Also, make sure to join the Private Lender Podcast Facebook group to connect with other private lenders and be a part of the community.
Are you ready to get down to the brass tacks of today’s episode? – Cuz I know I am!
Today’s topic is about lending to an entity instead of a person, and what you need to do in order to protect your money. So let’s dive in, shall we??!!
A retail loan to an individual
Retail bank (as well as SDIRA custodian) will require the borrower’s name, address, contact info, driver’s license, and social security number.
In the case of a loan or mortgage, the borrower’s social security number is important for 2 reasons:
- allows the lender to perform a credit report to help underwrite the loan
- allows the lender to report the borrower to credit bureaus in case of default or delinquency. This is how banks can keep some of the borrower’s skin in the game with a conventional or FHA mortgage – especially in a low or no money down scenario.
The same principles apply to Private Lending. While I don’t actually pull a credit report for a borrower, I require the same info as the bank, especially the social security number. If my borrower defaults, I can seek legal remedies against them with their social security number in civil court. And I can put a bruise on their credit report if I decide it is worth it to pay the money.
Now let’s look at what happens when Fraudulent House Flippers, LLC applies for a loan at the bank:
First off, besides requiring 20% of the purchase price at the closing table for an investment property purchase, they want to see the formation documents for the entity and who are the members and managers, and the LLC’s EIN or federal tax ID number, bank statements, etc.
They also require a personal guarantee, unless your LLC has a substantial amount of money deposited with said bank.
Why would they require a personal guarantee for a business loan? That’s a good question. But a better question is why should every Private Lender require a personal guarantee when lending to an entity such as an LLC?
I’ll walk you through the answer because it can ruin your day.
Let’s say I loan 100k to Fraudulent House Flippers, LLC to purchase and renovate a property. For three months I am paid as agreed, but in month 4 Fraudulent House Flippers LLC stops paying their note, and after the loan goes into default, let’s assume two things happen:
1 – I foreclose on the property – a hassle I don’t want but have accepted the risk
2 – Fraudulent House Flippers, LLC dissolves the entity and now you...
