In this new series, I want to share with you the good, the bad and the ugly that I have seen as an attorney involved in private lending transactions. I wish I could tell you that the ugly was the rare exception, but, unfortunately, it’s becoming almost a weekly occurrence. In fact, just as I had started dictating this article, I received a phone call from one of my good lawyer buddies regarding, you guessed it, a person who was borrowing money the wrong way. When I told him I was writing a series of articles about this very topic, he gave me some specifics that he wanted me to share.
I want to give you what I consider to be the “gold standard” for doing private lending. It incorporates four essential elements.
1. The lender supplies written closing instructions and all loan documents.
2. Those closing instructions and documents are provided to the title agency or closing attorney handling the escrow.
3. The lender requires the borrower to pay for a lender’s title policy.
4. The lender also requires the borrower to pay for a closing protection letter in case of malfeasance or mishandling of the funds by the title company.
If these four elements are adhered to, a private lender’s risk in a loan is greatly reduced because included in the closing instructions will be the information relative to recording the mortgage or deed of trust securing the loan in conjunction with the execution of the promissory note that documents the loan. When you are lending to someone you don’t know personally or know well, always do a secured loan.
