One Trick for Private Lenders to Use

One of the common errors made by amateur private lenders is to spend money and time on research without adequate protection. Consider this scenario:

You are introduced to a lending opportunity. The borrower is a local real estate developer who concentrates on adding value to properties. In this case, she wants $50,000 to completely refurbish the kitchen area in a large house. By her estimates, once renovations are complete, the home will be worth an additional $150,000.

The developer is willing to pay interest at a rate or 12% per year for a total of 18 months. She will allow you to place a second mortgage on the home as security for your loan.

It sounds like a good deal. You’ve been looking for a good asset that produces income. The two of you agree to the terms and shake hands on it. Then, you reach out to your lawyer to help with the paperwork and mortgage registration process.

After a week, your lawyer comes back to you with some troubling news. He discovered that the government had registered a lien on the property for $80,000. Apparently, the developer was behind on her taxes and was being pursued by the government for the debt. As such, your mortgage would be in third rank.

You are no longer willing to proceed with the investment. While you aren’t necessarily opposed to being in third position, you didn’t appreciate being misled by the developer. You don’t trust her.

Three weeks later, your lawyer issues an invoice for $500 for the work he did. Instead of earning a profit, you lost money on this investment opportunity without even getting the chance to make it.

This is known as origination risk, according to Alexis Assadi, a Canadian real estate lender. The way to mitigate it is to require the prospective borrower to sign an Offer Letter before proceeding with research. This document confirms that the lender is willing to finance a loan, on the condition that nothing new arises during due diligence. The borrower must also agree to reimburse you for any expenses that you might incur.

Therefore, the earlier example could have benefited from an Offer Letter that read similarly to this:

“I will advance a $50,000 loan to you for 18 months at a rate of 12% per year. It will be secured by a second mortgage on the property. You confirm that there is only one registered debt on the asset at this time. You also promise to reimburse me for all fees that I incur in connection with this loan. I will not complete funding if any new information arises during the course of due diligence that could materially impact my security. You hereby accept this offer.”

In fact, most Offer Letters are substantially lengthier and will outline all of the borrower’s representations, including property price and the value of all debts, etc.

Ultimately, the power of the Offer Letter is that it allows the lender to do research without losing money. Moreover, it is unlikely that a prospective borrower will accept it unless the terms therein can be met. It is better for both parties.

Getting Fast Results: 5 Essential Steps You Need to Take When Applying for a Credit Card

Applying for a credit card might be a difficult chore if it’s not something that you have done before. Still, it’s not so complicated if you reduce the process to a few steps and then be methodical about it. You can compare here if you want to see some different credit cards and interest rates, […]

Continue reading...

How Does Being a Debtor Affect You?

While the growth of consumer debt in the UK has slowed down of late, it’s estimated that the average British household still owes more than £60,000 to creditors. In total, people in the UK owed a combined total of £1.6 trillion at the end of September 2018, with this figure having risen slightly over a […]

Continue reading...

Boundless Borrowing: 4 Reasons it is Easier to Get Hands on Personal Loans Compared to Other Funding Options

bank loans fast

Personal loans have seen a big surge in popularity over recent decades. At this point, I feel like the entire world must have seen or heard an ad for these at least once. With the number of personal loans taken out growing steadily for years, it’s easy to see that we aren’t just seeing ads […]

Continue reading...

How Crypto-to-Cash Lending Works

"Cash rules everything around me", said a prolific writer once upon a time. The truth behind that statement is enough to make you ask just how much money actually rules around us and the answer WOULD be, everything. There's no way a person can have a good life without money, and a person without money […]

Continue reading...

Reasons Budgeting Apps are an Effective Way to Save

Managing finances is an important part of everyday life and is necessary in order to cover the essentials such as food, bills and rent, as well as for planning ahead. However, recent research has revealed that 25% of adults in the UK do not have any savings, while a study has shown 70% of working […]

Continue reading...

What is Financial Master Data Management

Finance-Master data

Master Data Management systems are offering solutions that are difficult to ignore in today’s complex business world. MDM systems aid organizations to improve the consistency and quality of critical data assets. These range from asset data, product data, customer data, and location data. This offers a myriad of benefits ranging from streamlining operations to increased […]

Continue reading...

How To Calculate And Lower Your Customer Churn Rate

Gaining a new customer for your business takes great efforts, and it’s always a painful moment when an entrepreneur loses a client. It is a bad experience usually referred to as customer churn and every business whether new, small, large or successful can suffer from it. The best way to start fighting customer churn is […]

Continue reading...

Should You Get a Cash Advance on Your Personal Injury Case?

find a finance lawyer

Not many people know, but it's actually possible to get a cash advance in a personal injury case. Basically, this is a loan that is taken out against the settlement amount that is expected. Keep in mind, there are some things that you want to think about and you should discuss your thoughts with your […]

Continue reading...

Credit Unions vs. Banks: 4 Differences to Help You Decide

If you plan on borrowing some money or opening an account, there are several different options available to you. Banks and credit unions are two of the more popular institutions to which you can go. But how can you choose between them? Part of making that choice is understanding the differences between the two. Here […]

Continue reading...

7 Advantages Of Using An IPad POS System

When evaluating your point of sale (POS) options, you might think that an iPad POS system cannot compete with the level of depth that a full, PC-based system offers. This is a misconception. Many restaurant POS systems are designed especially for iPads. They may be called the unsung heroes of the retail industry actually, as […]

Continue reading...

How to Get an Unsecured Auto Loan With Bad Credit

Car loans come in varied types, but there are two main ones: secure car loans and unsecured car loans. Unsecured car loans have lesser restrictions with the make and model of the car. You also have the option to ask for more money in covering the insurance, plus other costs during the loan process. All […]

Continue reading...

Auto Loans - What is 'Buy Here Pay Here'?

What Is a Buy Here Pay Here Auto Dealership? Buy Here Pay Here auto dealers are different from traditional auto dealerships. Where traditional auto dealerships fund purchases through a finance company that lends money to the buyer based on their credit history and score, BHPH dealerships finance buyer purchases themselves. Since they want to sell […]

Continue reading...

How to Determine the Value of Your ECommerce Store

Running an ecommerce store can give you a lot more freedom than a traditional brick and mortar store, but you still may want to sell it one day. Before you can sell your business, you need to know the value of the business. While it is true that your business is worth what the market […]

Continue reading...

Tips for Building Your Savings When You Live One Paycheck at a Time

While you know that you need to have an emergency account for things like car repairs, medical costs, a sudden job loss or something similar, you may have a hard time-saving money if you live paycheck to paycheck. We have outlined five steps you can begin taking now to build up your savings. Keep in […]

Continue reading...

What Is a Mix of Credit?

There are many different factors that play a role in your credit score, and one of those is having a diverse mix of credit on your report. While this factor makes up only about 10 percent of your credit score, according to Remitly, that’s still a fairly important chunk. So what does it mean to […]

Continue reading...

4 Tips That Will Help You Get a Loan Even If You Have a Low Credit Score

  If your credit score is not perfect, there’s still a possibility of getting a personal loan. However, the choice of lenders available to you may be limited, and the rate of interest for such loans could be high. If you require money but cannot wait for your credit to improve, shop around for loans […]

Continue reading...

The New Horizon of Quick Personal Loans for Bad Credit Holders – Things to Know!

Bad credit might have accumulated during your loan period owing to some unforeseen calamities in families and careers unsettling your personal circumstances. But basically, you, the borrower need not be dubbed to be bad or untrustworthy. More chances are to be given for resurrection in life. Financial firms including banks in large numbers stud the […]

Continue reading...

Planning Your Finances: When Is the Right Time to Apply for a Loan?

Applying for a loan can be incredibly stressful and frustrating if you don’t know what you’re looking for or what you’re doing. There are so many things to think about, and so many facts and figures to pay attention to, it’s no wonder so many of us get lost. One of the most common considerations […]

Continue reading...

Smart Financial Decisions: These 5 Personal Loan Mistakes Could Cost You Money

If you are thinking about applying for a personal loan, then you need to know that you aren’t the first, and will certainly not be the last. A lot of people have gone through this phase before, and some actually succeeded in getting whatever they wanted from their personal loans. However, there are so many […]

Continue reading...

3 Side Hustles You Can Start to Help You Get Out of Debt Quicker

In the era of the gig economy, the side hustle has become a popular way for workers to start their own businesses. Unlike previous decades, there are many opportunities for side hustles, including online businesses, consulting, and the sharing economy. When people start side hustles they feel passionate about, they often find a way to […]

Continue reading...
Do NOT follow this link or you will be banned from the site!