The real estate investing experience is crucial, especially to someone you don’t know or you’re not familiar with. You want to see a track record of a certain type of investing that you’re comfortable lending to or lending on. While past performance can be a pretty good indicator, it is no guarantee of future success. When you’re taking a loan application or if you are insisting that someone fills out a loan application, the first question to ask yourself is should you require an application of any borrower? The second question is if you do require an application, what information should you ask for? Learn the answers here so you can protect yourself and mitigate the risks.
I’ll be discussing whether you should require a loan application or not and what type of information would be beneficial or is the most important on a loan application. Before we get into the heart of that matter, I’d like to thank you for sharing your most valuable asset with me and that is your time. Time is the one thing that both the rich and the poor have in common. Everyone gets 24 hours in a day, no more, no less. The man who sleeps on the street has the exact same amount of time as the man who sleeps in an ivory tower. How you spend your time makes a huge difference in life and I’m grateful that you’re spending your time with me.
I’d like to pose two questions to you. The first question is, do you require an application or would you require an application of any borrower? When I loan to people like Chris Funk, my partner, Landon, or Ray Sasser, I’m in the industry enough with them that I don’t require an application. Maybe I should. I do require proof of identification though. However, I don’t always necessarily want or need to take an application from an investor like that. However, if I don’t know you, you don’t have a track record or at least a track record, I’m not going to loan to you. If I’m not familiar with you, if it’s a new joint venture or a new investment, I will require an application from that borrower so that I can get some background and it helps me underwrite the loan. That first question is do you require it? It’s going to be up to you. Everyone fills out the same form. I have all that information. If you’re comfortable with somebody, you may not need that application. I would suggest you verify that they have the funds to pay you back and the reserves to be able to afford the loan. The actual formal application you might not want to use, it’s up to you. It’s going to be a judgment call. In full disclosure, I don’t always require an application, but it’s a good practice. Repeat loans to the same borrower, that’s going to be your call depending on your comfort level with that borrower.
You want to protect yourself if you want to mitigate the risks.
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Then the second question, if you do require an application, what information do you ask for or should you ask for? This is where things can get a little hairy and personal. The deeper you go into somebody’s background, the better protected you are. However, the beauty of going to a private lender is not having to get the financial autopsy that the banks like to perform and some hard money lenders like to do. You want to protect yourself if you want to mitigate the risks. You also don’t want to make it so incredibly difficult for the borrower that they might as well pay a few more interest rate points or points on the loan to get the hard money without the hassle. I’m going to go over a few things with you that I like to require and that is first off, the investor’s name. All that good stuff, contact information, home phone, cell phone, work number, email addresses and the address that they live at. If they have a business address or if they’re borrowing in the name of a company, I want to know all that information, like in LLC for example.
I’d also like to have the information on their spouse if they’re borrowing as an individual. If they’re borrowing as a company, it’s a different topic for a different day. I would still get a personal guarantee from that person, which may give you some flack but I like to see skin in the game. That’s just me. When my borrowers have skin in the game, I feel a lot better and a lot more confident about making them a loan. If your borrower is doing it as an individual and not in an entity, an Inc, an LLC or a limited partnership, get the spouse’s information and have the name of the spouse on the promissory note and the deed of trust.
After I got the personal information, I want to see what they say that they make as far as their income, whether it’s a base income, a full-time job or a full-time investor which in itself is a full-time job but may not generate a W-2 for that person. I want to know about that. I also want to ask them about their real estate investing experience right up front. Outside of the financial information, I’m going to follow-up on this the most on somebody that I’m not familiar with. This goes back to the people, the process and the property, the way I underwrite a loan, the way I look at it. I want to see what that person’s process is. Are they a landlord? Are they a rehabber? If so, how many have they done? How many properties have they turned around? With some of the low-grade rehab, how many properties have they done a full rehab? Have they gutted the house down to studs? Have they had to rip out a pool and fill in the backyard? I’m sure everyone out there has had to pull at least one hot tub out from somewhere and get rid of it somehow. At least on the application, I want to find out a little bit more about them in that regard. It’s not so much on the application, but I want to see their portfolio. It’s hard to do that in the application.
Loan Application: When you try to cover things up and make yourself as you’re the expert when you’re not, it’s best to fess up, admit you’re wrong, and do what it takes to fix the problem.
In the application, I let them know. If you say you flipped 50 houses, great. Let me see the HUD statements. Let me see some photos, maybe a Google Drive. If they’re a full-time real estate investor, they’re going to have documents and records of pretty much everything they’ve put their hands on. I’d like to see if they are who they are. If they say they’ve done ten flips, ten rehabs, fine. Let me see before and after. Let me see the HUD where you purchased it. The HUD statement is called the closing statement. I have to ask our escrow officer. I want to see the HUD when they bought the property and I’d like to see the HUD when they sold the property. If they bought it for $120,000 and fixed it up and sold it for $250,000, I’d like to see that. I want to see success. I also want to see failures not to disqualify or to exclude anybody. If someone is going to be honest and say, “I screwed up on this one and this is what I did wrong,” I’m going to be more apt to loan to that person because they’re honest. They made mistakes. They know that in the game of life no one’s perfect.
When you try to cover things up and make yourself as you’re the expert and you’re not, I get into an underwriting area where it’s like, “I learned a long time ago in the oil field. It’s best to confess up. Admit you’re wrong and do what it takes to fix the problem.” I learned it earlier, but it came together for me when I was working in the oil field. I saw a lot of people. Some of the guys were straight up, honest and everything. Others did not want to admit they made a mistake. With full disclosure, it’s very humbling when you make a $400,000 mistake, especially when that $400,000 belongs to somebody else. I know it because I did it and I kept my job. The only reason I did is that I confessed up. I explained exactly what I did wrong and what I’ve done to make sure that it never happened again. I didn’t get fired from Schlumberger. That’s what I want to see in their portfolio and their experience. I want to see the good, the bad, the ugly. I want to see everything, what’s in all. Let me see what you do.
To recap, when you’re taking a loan application or if you are insisting that someone fills out a loan application, try to at least get their personal information, all the contacts, where they live and two forms of ID. I like a driver’s license and a Social Security card. However, this can open up an area that we should get into a little further discussion. When you start taking personal information like that, you need to secure it. Oftentimes, what I like to have the borrower do is provide their driver’s license and Social Security card at closing. They have to provide their driver’s license at closing to prove who they are because these are notarized documents. You get that automatically. You’ll get a copy of it and on the application, you can put the driver’s license number or Social Security number. I’d like to leave that off of the application to get a copy of it somehow some way and put it in a file cabinet or put it in a very secured digital environment, whatever a secure digital environment means. Before someone jumps up, especially an attorney and say, “You’re collecting personal data,” you want to be extremely careful with how you handle it. I have a file cabinet that’s safe and it locks.
In the game of life, no one's perfect.
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When I get my closing documents, I put a copy of the driver’s license and/or Social Security card in there and keep it there. I don’t like to keep it in email form, in Dropbox or anything like that. I like to try to keep it as safe as possible. Even if I need to put it in the safety deposit box at a bank with some of my other valuable documents. That’s something you want to consider when you’re taking it. Do not do it alone because you don’t want to do that. I’m saying to be aware of what you need to do, that you need to be protective of other people’s information because think if you were in their shoes, you would want that same courtesy and that same respect with your information. We’ve got personal information, contact where they live, how many properties they’ve lived at, when they had moved there, have they been there forever? Those kinds of things. Also a brief description of their monthly income. You check it to verify and see if anyone’s lying at the end of the day. Some folks, they go into the assets and liabilities. That is a different conversation. I don’t put that on the application. I’d like to see that in the portfolio, which will be another episode. The real estate investing experience is crucial, especially to someone you don’t know or you’re not familiar with. You want to see a track record of a certain type of investing that you’re comfortable lending to or lending on. While past performance is no guarantee of future success, it can be a pretty good indicator.
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