How Can a Private Lender Protect Oneself?

I am privately funding renos on a house that will be used as a rental property. What are some basic “must do” things I can do to protect my assets? I don’t wish to go through a broker but am happy to get a lawyer involved in drawing up a contract or at least looking over what we have. Is this enough of a safeguard assuming I already have a great deal of trust in the people I’m lending to and have references and lots of solid evidence of a trustworthy situation?


 You should have a contract and a recorded 1st or 2nd trust deed on the property to guarantee payment. You don't always know how the situation can go sideways but from experience I know it can, so you are making the decision according to your discernment of the risks and rewards of the project. 

I also don’t know how much you loaned and how much cash you have? I have loaned money to close friends without a contract or any collateral but I also knew it would not be the end of the world if I lost it and I was loaning a relatively reasonable amount in regards to earned income, net worth and credit worthiness.


Thanks for your reply. It’s a large sum. I’m having a lawyer draw up a contract that puts a caveat on their personal property with a personal guarantee of payment if they don’t pay. They have no other claims on their house other than the mortgage. The loan is a short two month term and we have references, have physically seen their other work, and have documents regarding their credit and the particulars on the property. I hope it’s enough!

This topic is a good opportunity for a coaching comment…when I finance anything that I am selling OR if I am buying a defaulted contractor’s invoice OR anything in between, if the borrower owns real property, I make it a point to secure the property as collateral.

Basically, I say to the borrower, you plan on paying, right?!! Well, if you plan on paying, then you would not mind putting your house up as security for the financing…then I get them to grant to me a commercial lien on their property (commercial liens have priority over mortgages).

What happens if you already financed something that did not have a lien? If it were me, I would send a ‘self executing agreement’ that would be a security agreement…in other words I send a Notice and Demand for payment with provisions if they do not comply…those provisions would include their non response and/or non performance will be memorialized with an affidavit and constitutes agreement to consent to a commercial lien against their property. I would also follow up with a second chance using a Notice of Fault, Opportunity to Cure…in other words, I sent demand, you did not sufficiently respond, maybe you forget, here is a second chance to respond, and when they don’t meet my requirements and deadlines, I memorialize their dishonor with affidavits and that dishonor constitutes their agreement and consent to a commercial lien.

Now, with their permission through this tacit procuration, I prepare an affidavit of interest in the property and get a commercial lien…with that lien, I am assured to be repaid through a number of strategies to enforce that lien right.

Hope this helps.