PLP-075 How a second lien wiped out my entire investment

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Greetings lender nation, and welcome to episode 75 of the private lender podcast. I’m your host, Keith Baker. And I’d like to thank you for sharing your time with me today. I’ve got an interesting episode for you today –  I look, I’ll just get to the point I’m going to tell you about probably the biggest mistake I made as a lender and how I lost money on a second lien and I’m hoping it’s gonna be a little cathartic. Hopefully no tears, not too many, but I do hope that you can learn from my mistake and protect yourself a hell of a lot better than I did. But before I get into that sob story, I do implore everyone listening. If you can hear my voice, please go to privatelenderpodcast.com/expo that’s EXPO and there you can get the link and the Promo code to the Quests Trust Co.’s Self-Directed Ira Expo in Houston this August 23rd through the 25th and if you use the Promo Code PLPodcast, you can get 25% off your ticket.

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And it’s our, it’s already a pretty low ticket price. I think it’s like 100 bucks for three days. General admission. If you want to do the VIP, I think it’s around three but a 300 that is, but definitely worth it. I went to the first one last year. I loved every minute of it and in fact I’m going to try to bring the kids out so that they can man the booth so I can go see more of the uh, of the speakers because it’s quite interesting to see how other, you know, it’s not just real estate, but it’s interesting to see how people use their self directed Iras and uh, you know, just the many aspects that are available to you. It’s actually a pretty cool thing. So again, privately to podcast.com/expo for your link and 25% off Promo code p l podcast. Okay, so let’s get into the sob story and I haven’t even prepared any notes for this. I might fumble through a little bit because, uh, I’m not gonna, I’m not sure if I want to get everything down that I want to get down, but here we go.

I always stress to people, especially when you’re starting off, never ever lend outside of the first position. Don’t take a junior position lien, don’t take a second lien and not because you can’t do it safely, but for starting off. A lot of people come to investors and say, oh, I already have the money for this. I need a second lien to basically fun there. Their costs through the, through the deal. It’s the pay for the primary lender. And I know guys that do that and they pay 8% and no more. And they are successful in this, they are pretty good businessmen – they’re not your casual real estate investor and it works in that case. In this case it doesn’t. And I’ll have to explain the background a little bit. A friend of mine wanted to do a rehab on a house that had been flooded after hurricane Ike and not Harvey, but I Ike and uh, it was a friend and then I was going to be charge a lower interest rate and we were basically going to kind of help each other out – trading consulting services.

There is  huge mistake. Keep, keep the loan a loan – only money, interest points, keep it simple and don’t try to get, you know, services or consulting or education or anything like that. Except when you know, I mean it’s for the terms of the loan, it just the money, the points and time.

So when I agree to make a loan, I’d never made, cause I dropped my interest rate down to like 6% and no payments for 6 months in exchange for business consulting that never came through and it was never agreed to, which is my mistake right there.

I’m done and I’m not blaming my friend. That’s my problem. That’s my fault for, for doing that. I thought it was going to be cool. And I, you know, basically I invested into their vision and their excitement and their enthusiasm for the deal in a second position. And I trusted their comps that were provided to me. I know these are rookie mistakes. This was a while ago. Um, but it’s still kind of, it’s still kind of raw. And if I’m going to put my voice out there on the airwaves that, uh, about private lending, I think it’s a, it needs to be in full disclosure when I tell you not to do a second lien. There’s a good reason. There’s a pretty damn good reason why I advocate against it. But anyway, let me get back to the story. The consulting never happened. I drove by the house, and no work had been done about six months into it and hey, what’s going on? Yeah, yeah, yeah. Blah, blah, blah. “Excuses and no worries. Everything’s going to be on, you know, we’re going to have it listed in, you know, two months.”

Four months go by. I don’t hear anything. Try to contact the friend. Nothing. Okay. Now, now my feelings are getting hurt a little bit, you know, be honest with you. This is a friend, somebody that I had, admired some aspects of their life.  And here they are not paying as agreed and not only giving me bs excuses, but I’m having to chase them to find out what, what’s going on. And that’s like the trifecta right there.I’m lazy. So when you, when I have to chase you or foreclose on you or, you know, find, you know, do work, I don’t like it. It doesn’t put me into a very empathetic mood. Let’s just say that. But the real, the real kicker is when I found out that the property, the subject property that my second Lien Position Lien was on, was going up for foreclosure and I contacted said friend and asked what’s going on? “Yeah, I’m will try to pull a rabbit out of the hat. It’ll be okay. “

Okay, I said- trusting the friend.  They were able to have the foreclosure postponed – Great!

However, if the borrower is not going to make the obligations or meet the obligations the first time, the odds of them not meeting the obligation for the second time or even third time. And that’s exactly what happened. And so it goes back to foreclosure. I call up the trustee and said, I have a second position Lien. Were you aware? No, we were not. Do you want to make this loan, this loan, the loan whole? You know, bring it up to payment, bring the payments current which basically needs to be done. Do you want to pay off the loan? And it was a heck of a lot more than I had loaned my friend. It was about 50,000 and I had loaned at my friend 15 and actually no, 18, sorry, 18 and it’s gone. It was foreclosed, the house is no longer mine or I never was mine, but my money is gone, disappeared and vanished.

well, some of you might be thinking, oh, you know, you be angry at your friend, which is certainly an understandable emotion. I felt like a complete idiot. I still do and I don’t know, it’s not something I actually want to admit, but I figure in this internet age and, and, and just everything like, you know, transparency is huge. And so, yeah, I’ve, I’ve screwed up, I’ve made some pretty bad mistakes. I’ve also gotten lucky on a lot of them. I’m not going to  sit here and tell you I’ve done thousands and thousands of private loans. I haven’t, but I’ve done enough to where when I look back, I can see my mistakes, I was so lucky there, you know, that, that, that could have, that really could have come back to haunt me. And this is the, I guess one of the biggest ones. And I should have, I feel like now I should have put this, you know, much earlier in the episode count and not wait until the 70s.

This is very the very reason I decided to come up with the private lending pillars of which I have four right now.

 

PILLAR 1 – Number one, never loan money to a friend or family, but rather give them the money without the expectation they’re going to pay you back.

And if they do pay you back, then great. It all works out well. But if you loaned the money to the friend or family, and this doesn’t have to necessarily be for, you know, private loan to a real estate investor just in general, don’t loan to that friend, give, give him the money, you know, maybe it’s a payday loan or whatever. If you have the money to give and you don’t get it back, that’s fine. Give it, give it away, move on.

However, in this case, because the friendship and tangled things up. The services portion of the loan wer never agreed.  I should’ve never wired the money without that agreement in place. You know, and just, that’s just a big case of dumb ass right there. But you know, I was, I’ll say I was young, it wasn’t that young, but I was younger and dumb and I had bought into the enthusiasm of the borrower and that is a death trap or can be. Fortunately it was only 18,000 that amount. But, um, what are you going to do? You know, that’s a loan I shouldn’t have made. Yes. My friend should pay me back. That goes without saying, but you know, this is a lesson I learned.  So hopefully you can, you know, carry on and say, yeah, Keith, you were, you’re an idiot. That was stupid. Hope you learned your lesson. Because I have, trust me, I have, but maybe you can take that with you and you know, just learn from my mistakes. Don’t do what I did. I did “do as I say, not as I do”, or not as I did. How about that? Uh, so with, uh, I can happily say I have no second liens out there.

These days, all my loans are in the order in the first position. So yes, I have definitely learned learn from that mistake. So yeah, never lend to your friends. Another, pillar is return. Care about Roi is the most, is the most important thing you should think about first, the return of your investment.

PILLAR 2 – As a Private Lender, your primary concern is ROI:  the return OF your investment first, then the return on investment.

Because here in my case, I did not put that as a priority and there you go. Lost the money. I also think of a great pillar to have is that it must be a win win for everybody and everybody has to know the situation.

PILLAR 3 – The deal and loan must be a Win-Win-Win situation for all parties before I agree to participate and lend. 

And the reason I bring that up as let’s say in the case of owner financing where somebody like Mitch Stephen or I’m a partner, Landon and I will, will purchase a house through with private money and in turn around and sell it with owner financing. And our buyer covers the note back to the private lender. I won’t do those deals unless they’re vetted through a residential mortgage loan officer or loan originator, sorry. And that the buyer, the end buyer is aware that his lien with the owner is sec a second lien. Uh, and I’ve, we’ve had them a tour and they, a buyer’s said, nope, I don’t want that.

Um, there’s, you know, anyway, I’m getting ahead of myself there, but it’s got to be win, win, win is what I’m trying to say. And I’m babbling again. I’m sorry, folks. And then of course in the lesson in all of this second lien, was not doing my due diligence, buying into the enthusiasm of the borrower, not believing a friend could do that kind of thing.

PILLAR 4 – Never Trust, Always Verify.

Especially comps, especially low activity in the area. Always verify, never trust him. And if you do that, they’ll follow those four pillars. You’re got a really good step down the road and into the private lending world. So that’s what I’m going to leave you with after this episode. Please remember to go to PrivateLenderPodcast.com/expo and we don’t, I don’t get any money for that link that is on the expo page. It just tracks who came through me basically. Because Quest, can’t share funds and you know, anything like that. I can’t monetize that at all. But what I can do, and um, this is an episode of full transparency. Scott Carson is going to be there and last year he was the vendor who had the most ticket sales are coming through his channels. And I like Scott, he’s a friend, he’s a great guy, but I’m also very competitive and I, it, I just, I want to beat him. Okay. I do. I, you know, I want friendly competition. But I, I want to beat him. So if you go, please, please put that link out there. Put it on your social media, you get it out there to everyone you know, it doesn’t matter who uses it and they get 25% off.

That’s a, that’s a, that’s a great deal. I mean, you can’t beat it. But yeah, that’s the reason I am, I really, uh, really pushing the quest expo this year cause I want to be, uh, I want to be number one, but I definitely want to, I want to rank, let’s put it that way. I want to rank and get as many people out there as possible because it really is a cool event and I’m going to be there. Uh, the kids would probably be there for at least some of the days. I might let them skip school.  Anyway, it’s a lot of fun. So that’s it. I think I’m done rambling now. I’ve got about a quarter hour in, you’ve got my sob story. What do I say you shouldn’t do? Second Liens and why you should stick to the Private Lender Pillars.

Now, I always have a touchstone to come back to, to guide you, especially when people tempt you with all types of things.  “I’ll pay you higher interest”, you know, they’ll, they’ll will want to structure the deal this way in their favor.  So it’s good to have a touchstone or something. I have those, those pillars, you know, those commandments for lack of a better term, uh, and have those in and don’t do second liens. So there, all right. That is all for today. I wish all you guys out there, positive self awareness, happy thoughts. Uh, uh, I just had a Bill Burr moment. I was about to tell you where “to go”. But anyway, I do wish you happy and prosperous private lending, and I’ll see you on the next episode.

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About the author, Keith Baker

My ultimate goal is to create an economy for Real Estate (and other) Investors where banks are no longer needed. An economy where every day people look to each other for leverage and support. During the day I am an insurance adjuster for the oil field, where I handle millions of dollars of other people's money (OPM), and by night I invest in Real Estate and host this podcast. I hope you have an excellent experience and find real value within this website and the Private Lender Podcast. Please leave comments or submit your questions on the Contact Page.

I wish you prosperous, safe and happy lending and investing!

Thanks for listening

-k

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