When making asset based loans to Real Estate Investors, here are a couple of tips to maximize success and minimize the risk of loss:
Always get a copy of their state-issued ID and social security number.
Even if you never plan on pulling credit reports, this is your main method of positively identifying the person with whom you are doing business. This is especially critical when the person has a common first or last name. This helps you check their background and history, and in the event of default, aids in complying with the Servicemembers’ Civil Relief Act (SCRA).
Insist on getting a lender’s title policy.
While this is an additional cost to the Borrower to close at a title company, the savings is huge if a title defect comes up. If there is a claim, the borrower’s policy may reimburse up to the purchase price. When you make a loan that includes repairs, your claim may not cover the full loan amount. That’s what your lender’s policy covers.
Always get a written scope of work.
Your underwriting assesses the risk based on the REI making certain, specific, improvements to your collateral. To adequately protect your investment in this loan, you need a written scope of improvements the Borrower promised to make. If their rehab isn’t progressing or varies from their representations, you have grounds to address the potential default informally. If the Borrower refuses to correct the situation or is in over their head, you can foreclose to protect your collateral instead of waiting for them to miss a payment.