The Risks of Hard Money Lending: Part 1 of 3

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Over the last year, I have seen a dramatic rise in “hard money” lending not only among investors, but by friends and family of investors. Almost all are doing so without understanding there are rules and risks with lending. To understand these rules and risks, we’ll start with defining lending terms.

Private lending is any loan between a borrower and a non-institutional lender. This could be a loan from your father for the purchase of a car or education. Private loans can be unsecured or secured on things like vehicles, personal property or inventory. Private loans are generally not regulated.

Hard money lending is a private loan that is secured on a hard asset like real estate through a trust deed. Also, these loans are often referred to as “mortgage” loans. Mortgage loans are regulated. And may require a license to provide!

A closed-end mortgage is a loan for a fixed principal amount that is paid down, like most mortgages you think of. An open-end mortgage has no fixed principal. A HELOC is an example of an open-end mortgage. Mortgages, as you probably know, can also be in a first or lower position. This relates to which mortgage is recorded first.

Open-end mortgages as well as loans in second or lower position are not regulated by the Division of Real Estate. The problem arises, however, if you are making loan to someone for the purchase of real estate secured with a closed-end, first position mortgage. We will cover this in Part 2.

 

Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180



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