Private lending can be a very attractive investment opportunity, offering the potential for higher returns compared to traditional investments.  However, it’s essential to carefully evaluate and underwrite each loan to your level of risk tolerance.  Here’s a closer look at why this is:

Risks of Private Lending:

1. Liquidity Risk: Unlike publicly traded investments, private loans can be illiquid, meaning you may not be able to easily sell or exit your position if needed.
2. Market Risk: Economic downturns or changes in local real estate markets can affect the value of underlying collateral, impacting the recovery of funds – in the event of default.
3. Operational Risk: Issues such as fraud, misrepresentation, poor loan servicing, etc. can negatively impact an investment.
4. Credit Risk: Private loans typically involve borrowers who may not qualify for traditional financing due to credit issues, unconventional income sources, etc. This can increase the risk of default if the borrower is unable to repay the loan. Generally, a borrower in need of a private loan has a poor record of handling their finances; therefore, we are not surprised and recommend NOD sooner than later if a borrower fails to uphold their end of the loan.

Importance of Loan Underwriting:

Knowing your own risk tolerance is important in any investment, including Private Lending.  The underwriting you do on any investment is the cornerstone of managing this risk, and ensuring an investment remains a viable investment strategy.  Key aspects of underwriting for a Private Lending could include:

1. Valuation of Collateral: Consideration and evaluation of the property through a review of an appraisal, a Comp Analysis, on-Line valuations, current photos, contacting a local real estate agent, a drive by of the property, etc. This would be done to determine its current market value. This is most key as a great many Private Lenders will do a loan based on either: a) is the equity sufficient for them to sell the property with no loss if foreclosed on? or b) if foreclosed on, would they be okay with owning the property?
2. Assessment of Borrower: Many Hard Money companies skip this step and lend solely on the property and the collateral.  However, some Private Lenders might include a review of the Borrower’s profile, such as credit history, income documents, debt-to-income ratio, etc. to gauge the borrower’s ability to make their monthly payments.
3. Loan Structure and Terms: Reviewing the loan term and loan purpose to ensure the length of investment and purpose of investment meet your risk assessment criteria.
4. Exit Strategy: Considering the borrower’s potential exit strategy.  And in the case of default, such as foreclosure or renegotiation of terms, what options you would be willing to consider.

Mitigating Risks Through Diversification and Professional Advice:

Diversifying investments across multiple loans and seeking advice from professionals with experience in private lending can further mitigate risks.  By spreading investments across different borrowers and properties, you can reduce the impact of any single default.  Instead of putting all your funds in a $1,000,000 loan, you could consider two $500,000 loans or four $250,000 loans, etc.

Conclusion:

While private lending offers attractive returns, it comes with inherent risks that can be managed through underwriting and your due diligence to weigh an investment against your risk tolerance.  By keeping the above points in mind, Private Lenders can enhance the likelihood of achieving their investment goals while safeguarding against potential losses.

In summary, the success of private lending hinges on informed decision-making and one’s risk assessment/underwriting practices.  All investments have inherent risks and knowing what each is will help you to achieve your investing goals.

Our Role: 

Here at Pacific Direct Mortgage, we pre-screen each borrower based on the general guidelines of what the majority of our Investors are looking for in a loan. However, as each Investor’s criteria differs, every loan may not be the fit for you. But rest assured, if you are looking for anything specific, we will work to find it for you.  We compile and provide you with a loan package, for your review as part of your underwriting, all documents that we gather on the borrower and property – you see everything that we see. We do not send out available Trust Deed Offerings that we have not pre-screened.  

Since we offer Private Money lending, the borrowers seeking this financing are not necessarily your “A paper” type borrowers with perfect credit, etc.  This is why it is important you do your own due diligence & underwriting process so that you understand and are comfortable with the risk factor of each investment opportunity you consider.  

As always, I look forward to getting you more investment opportunities.