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  • Peer to Peer Lending

    Risks of private first charge lending/loans?

    What are the risks entailed in lending money if you are given first charge on the property?

    You would have the legal fees entailed in having to repossess the property if the owner misses payments right? Anything other than that that i am missing?

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    are you sure that the property is worth the money you are loaning ?

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    Yes, don't lend money!

    It could cost you thousands to re-possess the property, ruin your relationship with the person, give you huge amounts of stress, and you should keep control of your own money, not hand it over to a third party.  You are the best custodian of your pension/child's inheritance/[fill in the blank].

    Famous Chinese proverb:  "When man with money meets man with experience, man with experience leaves with money, and man with money leaves with experience".

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    Ha that proverb gave me a good laugh!

    It seems there are plenty of potential drawbacks to doing it. Some food for thought indeed.

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    "Anything other than that that i am missing?" ....................... and everything else that a bank has to consider before they lend. 

    Valuation, desirability, LTV, credit checks, asset/liability assessment, insurance, recovery, possible FCA and/or PRA regulation, borrower affordability, customer profile, construction type .... etc. 

    These are just a FEW of the myriad of considerations and due diligence that a property finance lender should include before lending a penny.

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    Lending the money is the easy bit, whether its secured by a 1st legal charge or not.

    Making sure that the borrower pays you the interest they agreed to and when they agreed to, monthly / anually etc  and that the borrower repays the loan in full and on time, is the difficult bit.

    So the very basics are:

    • knowing who you are lending to (KYC and AML check)
    • why do they own or are buying the property
    • what are they doing with those funds (whats their business plan)
    • how will they make monthly interest repayments
    • how do they intend to repay you the capital lent
    • need a RICS valuation on the property to agree what its value (so you can understand your LTV / risk)
    • need a legal report on title to ensure that you are able to take a clean 1st legal charge
    • need to document the loan and the security properly (loan agreement, legal mortgage, debenture and PG if lending to a SPV)
    • need to register the charges at land registry and companies house (if applicible)
    • need to ensure that they service the loan monthly
    • if the loan goes into default, then as the lender you can become a mortgagee in possession, have the right to appoint a LPA reciever. They will take control of the property and generally sell the property in order to redeem the outstanding loan.
    • the costs of the LPA reciever and the sale cost, will sit ahead of the 1st legal charge in the repayment waterfall

    Lending risks include:

    • borrower fraud
    • borrower not paying interest
    • borrower not repaying capital
    • borrower not executing business plan
    • loss of rental income / tenant (if investment loan)
    • development risk (if property development loan)
    • loan and security not correctly documented and registered

    Property debt can be the safest property investment if conducted correctly. The lender has a 1st legal charge, sits ahead of the equity (who provide a cushion of a minimum of say 25% if the property were to fall in value), is first in line to be repaid when the property is sold or refinanced and requires the borrower to get permission for any changes to the property.

    Remember, until you own a property unencumbered, whilst your name may be on the title deeds, the lender of record is in a very strong position.

    If you are interested in earning regular monthly income from 1st charge lending, have a look at our website - lots more information there.

    Vanessa - love the chinese proverb 

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    Proplend Borrower Team
     
    T: 0203 637 8418 |  http://www.proplend.com
    15 Little Green, Richmond, TW9 1QH


    exactly what I said above   :-)

    And now pity the Broker who has to know the criteria, quirks, discretion, policies, DICR and other 'hoops' that our Clients have to jump through, for each lender.

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    Really valuable post @proplend. Thank you so much for taking the trouble to write this as it will be of great value to the community on-going where JVs are very much in favour ....

    Here's reprise of our interview with mortgage broker Lisa Orme:

     
    See also >>> Golden rules for lending Developers Money

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    Excellent information! 

    My initial thoughts that someone would have to do the exact same DD as a mortgage lender would do seem to be not too far off. 

    The legal drama that can ensue seem to hardly be worth even thinking about anything like this.
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    One additional question to @proplend's list:

    What is your "Plan B" if "Plan A" does not go according to plan?

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