In my last post I began to dive into the inner workings of laying a foundation for how one can go about getting involved as a private lender. As I have stated in my previous post's, this can be a passive source of income that you place your hard earned capital to work. Whether that is from a Self Directed retirement account (SD IRA, Solo 401K) or even from a savings account or checking account. There are other sources of finding and accessing capital that you may not even be aware of. I will discuss that with you later. So if you have the capital to invest, and you have similar requirements as I did, found HERE, then the next question is how do I begin to lay a foundation that will ensure I am able to protect my investment and increase the probability that I will receive not only the yields I am looking for but the return OF of capital. The first step is to begin laying the foundation of knowledge. In Proverbs 8, we are told that wisdom and knowledge cry out in the street and they call out to all who will listen. These things are not hard to find, but you must be open and willing to find, hear, receive and then apply what you learn. This will in turn produce wisdom for yourself, and then you can pass this onto your family. This is the true foundation of generational wealth. Here are some great books that you will find useful in creating that foundation of knowledge:
- The Bankers Code - George Antone
- The Wealthy Code - George Antone
- Making the Yield - Salvatore m. Buscemi
- The Value of Debt - Thomas J. Anderson
Now as you may or may not be aware of this industry is fraught with fraud and deception. You must commit to operating at a level of transparency and honesty that will disprove anyone who says otherwise. One of the first steps you will need to do is contact a real estate attorney. By speaking with a real estate attorney, you will be able to find out key issues pertaining to your state in private lending. This includes but is not limited to laws on usury, whether your state is a broker/ non-broker state, drafting up loan documents that protect you and keep you on the side of the law, foreclosure laws as it pertains to lenders in your state, bankruptcy laws, the process of originating a loan, the process of closing a loan, the roles of professionals in regards to a closing a loan, and on and on. This is alot of information, and you will not be able to fully and completely understand all the laws in regards to your lending activities.
Since we are on the topic of attorney's let me state a few things that I have learned through the process of making loans, and why its important.
- Is your state a broker or non-broker state? This question is important. in some states you as a private lender cannot directly solicit, negotiate or offer terms and rates to someone who will borrow funds from you. If the state is a broker state, you must coordinate with a broker to conduct private lending. In non-broker states this is not a requirement, however there may be other requirements as it pertains to lending.
- Pros - Having a broker as the intermediary allows you to make decisions without the emotional involvement of dealing with someone you may have a relationship with. Having a broker will allow you to receive constant deal flow. Meaning you will often get deals sent to your inbox/ phone so that you will have a higher chance of success of making a loan that fits within your risk profile and your risk tolerances. If the state is a broker state, there must be a license requirement. This means there is annual training required by that states brokerage licensing board and certain criteria for a broker. This means you have a much greater chance of working with someone who has their lively hood on the line than if you were working with a broker in a non-broker state, which brings me to the cons....
- Cons - By making loans in a broker state, and being required to work through a broker, means that you will have to share in the loan origination fee. This means that you will (should) be conducting the same amount of due diligence as if you did not have a broker, but now you are getting paid alot less to do this same amount of work. If your in a non-broker state, and you are working with a broker, remember there is no licensing requirements in non-broker states. What does this mean? You could literally have a Joe Smo off the street trying to peddle loans for a buddy of his, and it could all be a scam. Ask me how I know.
2. Is your state operate by a Notice or Race, and is it a judicial or non-judicial state? This is a twofold question in regards to your states foreclosure laws. Simply broken down if you have to foreclose on your borrower, will the process have to go through the "judicial" process or go straight to foreclosure? For example in TX they are a non-judicial state. And if your the lender and you do not get paid your monthly interest payment, you can foreclose on your property and have that property not only under your control but now you own it, in 21 days. In Florida... think 9months ... at a min! These are important laws that you need to be aware of when making loans in your state.
All this being said its extremely important to use the wisdom and knowledge from an attorney in your state. Be sure to check your local state BAR website, to check on the attorney's license. Working with an attorney who has bad marks or a letter of reprimand from the state is never a good option, especially when you are entrusting them with the safety of your hard earned capital. Stay tuned as I will continue to describe and go over each key player that you need to have on your team as a private lender.