Like any investment, there are certain risks that you need to be aware of and understand. However, what’s more important is that you understand how to nullify these risks. Most if not all private lending risks can be diminished or eliminated completely if you properly structure your loan transactions.

Liquidity

You must be sure that you won’t need your capital returned during the term of any loan that you make. Unlike a share of stock or publicly traded bond, private money loans are not readily saleable and thus are not considered a liquid investment. Loans mature at the end of a fixed term, and although you hope that they will pay off at the end of the term or sooner, some loans won’t pay off until a later date if the borrower isn’t able to pay as expected. In this case, it may be necessary to renegotiate the terms of the loan or to foreclose on the secured collateral.

MMG Capital has addressed the issue of liquidity with the creation of the Investor Liquidity Program. Investors that participate in MMG Capital Investment Programs have the option to withdraw their funds at any point during the term of a loan that they’ve made. For more information, take a look at the program details.

Collateral Valuation

The most important part of making a private loan is properly securing it with collateral. If you’re not a real estate expert, you run the risk of improperly valuing property and putting yourself in an extremely risky position. Especially in down markets, it’s not only necessary to leave a sufficient equity position in your collateral, it’s also necessary to account for the potential of further market decline, accrued interest and legal fees that will need to be paid to foreclose.

Title

The potential for there to be defects in the title of a property can cause headaches for a private lender. However, insuring your lien position properly with title insurance can eliminate many of the risks associated with these title defects and even for fraud.

Documentation

There are a number of state and federal laws that govern loans secured by real property. The way that you transact a private loan can be more of a liability than an asset if you don’t adhere to these regulations. Making mistakes in your documentation can not only expose you to the possibility that your borrower could find a loophole in your loan agreement and to avoid repaying your loan, but it could also subject you to the possibility of making an invalid loan and having regulators impose fines or forgive your borrower’s debt.

MMG Capital closes each one of its transactions with a competent attorney. Many private lenders do not utilize an attorney for their transactions and as a result put themselves at great risk of loss.

Default

When you make a private loan, you hope that your borrower will make all of their interest payments on time and repay the balance of their loan within the agreed upon term. However, there is always a risk that it won’t happen that way and that you’ll have to enforce your right to collect on your borrower. Even if you have properly secured your loan, there are a variety of risks inherent in the foreclosure process: risk of time, accrued interest, diminishing returns, accruing fees, declining market values, distressed sale value, foreclosure laws, the potential of ownership, etc.

What’s important to note, however, is that like other risks, all of these risks can be mitigated or eliminated by properly structuring your loan with these risks in mind and sufficiently securing your loan with collateral.