The Four Horsemen of the Loan Apocalypse
On Protecting Title, Avoiding Fraud, Having Tight Loan Docs & Being Properly Insured
What I’m reading: The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Power and Greed of Wall Street by Max Frumes and Sujeet Indap (on Twitter https://twitter.com/sindap)
If you’d like to see the takeaways and thoughts from the books I read, give me a follow on Threads HERE
“I can take more punishment than anyone in the business.” -Ric Flair, one of the Four Horsemen (and also Hard Money Lenders that fly by the seat of their pants)
I’ve previously discussed Lending as a Negative Art.
https://twitter.com/flynn_bob/status/1457756008839778304?s=20
This negative art dynamic means you better understand what can kill you when making a loan. Behold, the Four Horsemen of the Loan Apocolypse:
Title
Fraud
Loan Docs
Property Damage
Title
As a lender, you need a lender’s title policy to perfect your lien against a property, but this is just table stakes. Most reputable Hard Money Lenders, review a title commitment (or preliminary title policy) in order to make sure there aren’t odd exceptions in it, pull the thread and review other recorded documents referenced in the report, get endorsements to provide coverage for a number of standard exemptions, have the escrow/title company sign their lender’s escrow instructions, and get a closing protection letter from title.
The purpose of these steps is to make sure that your lien is protected by a piece of collateral that’s actually marketable.
Fraud
The F word. Where can fraud enter a deal? A borrower or would-be buyer might commit fraud. A closing agent might walk off with the funds they have in escrow. A phishing email might insert new wire instructions into an email chain between title and a lender in an effort to get you to wire their bank account.
I could walk through a list of ways to safeguard against fraud but suffice it to say, only the paranoid survive. I funded a loan a couple of years ago with a closing agent whom I’d never worked with before, in a market that was new to me. I searched the closing agent on Google Maps, saw the strip mall they worked out of, and called some of their neighboring businesses to make sure they were legit, had been in business for some time, and that their neighbors saw customers coming and going from the closing agent’s office etc.
Did the people I spoke with think I was an oddball? You bet. Who cares.
Loan Docs
Don’t be cheap. Hire a reputable creditor attorney in the market where you are lending and have them draw your loan documents—for each loan. They’ll make sure you aren’t running afoul of usury laws, local or state consumer-related laws etc. The last thing you want is a borrower on a non-owner occupied investment property, making a credible claim that they’re actually an owner occupant with a usurious consumer loan and a balloon hanging over their head.
Property Damage
We have our borrowers prepay 6 months of property insurance and add us as a loss payee to their policy. This means that if there’s an insurable event, we are getting paid prior to the borrower
.
They’re also required to insure their property for at least as much as they owe us. This approach works great for our 6-month fix and flip loans, but eventually, we’ll be making longer-term loans. Once this happens, monitoring insurance becomes a serious business. If a borrower’s insurance policy lapses or expires, a Hard Money Lender needs to shoot first and ask questions later (put forced-place insurance in place asap and let the borrower renew or reinstate their policy later).