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  • Entrepreneurs

    How to stay safe lending money & property JVs



    JVs and offering suspiciously high rates of return to lend money seem to be common themes in certain quarters. We have heard of many cases recently where loans have not been paid or JVs have turned sour.  

    Some of the amounts of money are eye-watering and many people have not only suffered significant financial loss, but also emotional stress.

    Remember that this activity is completely unregulated, and, as such, if it turns sour, you have very few courses of redress.

    An old Chinese proverb States " when a man with experience meets a man with money, soon after man with experience ends up with money, and man who had money ends up with experience..." . Smile

    On that basis, I thought it might be helpful to put together some information to make sure that you do not get stung.

    Traits of a high risk borrower:

    1.  A general comment about anyone offering high rates of return - ask yourself why they cannot loan money from a bank at circa 6%?

    Why would they give away a significant part of their profit borrowing money of private individuals at extortionate rates when they don't need to?

    Make of that what you will but all the successful property developers I know have the banks falling over themselves to lend them money and the don't need to send out emails asking for loans.

    You should actually be MORE wary of people who claim they are very experienced, offering very high rates of return. The more experienced you are, the more assets and cash-flow you have, the less risky you are to lenders and the less return they have to offer you because they should have plenty of options at 8% pa or less. (Fact of life, the more you have, the cheaper your borrowing costs) 

    2.  Carry out a HPI check on any vehicles that you know are 'owned' by the would be borrower

    A proper HPI check isn't free and there is no automatic link between the results of it and whether the borrower is good for the repayments or not, but it will at least give you something to ask about.

    If, for instance, someone appears to own a Bentley, a Range Rover, a Ferrari etc. but the HPI checks show that they are all on the chuckie, that is more likely to be a bad sign than a good sign.

    Read this salutary tale of an investor who was fooled by a flashy lifestyle.

    3. Ask the potential borrower to provide a copy of a very recent Experian and/or Equifax and/or CallCredit report about themself.

    Given that to subscribe to a service that lets you monitor your credit files is about £15 a month, I would say that anyone regularly borrowing tens of thousands of pounds from private investors should regard that as a cheap and easy way to provide evidence that they are good for the money they want to borrow.

    A bank would have easy access to a detailed credit report and a comprehensive application form on which to make a lending decision.  An individual, as a lender, should put herself in a position to have as close to as much information as a bank would get to inform her decision.

    Golden Rules for lending money:

    1. Don't lend more than 65% of the 90 day firesale value of the property in its current condition, (i.e. NOT 65% of GDV or done up value, but firesale value of the property in its current condition)

    2. Take 1st and sole legal charge on a property which is owned by the person(s) you are lending money too. Remember a person is a separate entity to their Ltd company. Lend to the borrower personally, not to their company.(Don't take a charge on property not owned by the borrower. It gets too complicated)

    3. Check (by doing a land register search) that the borrower is a UK home owner. Look at how long ago they bought the property, how much they paid for it and do a Rightmove rough valuation to determine that they have some equity in their own home. (This gives a bit of extra comfort). Once again, avoid situations where the borrowers name is not on the title for their own home. 

    4. Don't allow borrower to take another loan from someone else and put a 2nd charge on the property. (put a clause in your contract)

    5. If the borrower needs to exit from the deal in order to pay your interest, then take the interest up front. e.g. You lend £100k at 10% pa for a fixed 12 month term. You advance £90k having taken 1 years interest up front.

    6. Only take interest on a month by month basis if the borrower can demonstrate that they have positive cash-flow to service your interest payments from outside of the property deal you are financing

    7. Don't just look at the deal you are financing but the person you are lending too. What is their asset base? If you lend someone £100k and that is their first property and they live themselves in rented accommodation, then most of their financial footprint is in the deal yo are financing. Thats not good! If you lend £100k to someone who has a further £1m of property to their name, then they have a wide finical footprint beyond the deal you are financing and it would not be worth their while to declare bankruptcy over your deal.

    8. Always lend for a fixed term at an agreed rate. Have in the contract that if loan is not repaid by end of the contract then the rate payable increases. So you might lend 10% for 12 months, put if not repaid at month 12 then this will go up to 18%. Have in the contract that all legal fees will be charged and no warning letters will be issued. This means that if the borrower honours his side of the deal, he will get a good deal. But if he doesn't, you will get something back for all the hassle you will have to go through to get your money back. (with an upper loan limit of 65% of firesale value, their should be enough in there to get all you money back.)

    9.  Always use your own solicitor and never a firm that the other party has recommended and ensure that your solicitor understands property.

    10.  Remember, only one person or entity can have a first charge on a property. Very often it is a bank. Note that banks do not like multiple charges on a property.

    If a bank is not involved, you should ask the individual wanting to borrow the money why they are not using bank finance at lower rates. That is a completely legitimate question. Higher finance costs reduces the profit, so any savvy developer would be looking for the cheapest finance possible.

    If you have a second, third, or fourth charge, then you are way down the pecking order and may struggle to recover your money if the project fails.

    If your loan interest payments turn out to have been paid by loans from other people and not actual profit from the development/business, then this is classed as a Ponzi scheme and is likely to collapse eventually, as well as being illegal.

    If a Ponzi scheme is unwound, any interest you were paid could be recovered by the "Proceeds of Crime" Act.

    So you would lose your capital and the interest in this instance.

    If you are being paid interest from the start of the project, you would have to wonder where the interest payments are coming from, because the profit from the property would not be realised until completion/re-finance/sale.

    Also consider that it can take between £40K and £50 gain to gain possession of a property you have a first charge on.

    11.  Be wary of loans and JVs solicited on Facebook.  It is a very well known arena of scam operations where social proof is given, and often not based on anything other than someone "liking" someone else.

    See - 8 signs you are about to become the victim of a scam

    Summary:

    Unless you have the ability to properly credit score someone that is exhibiting the characteristics of a high risk borrower (offering 12x base rate is one such characteristic) and to then lend to them as part of a properly thought out investment portfolio , it is probably wise to steer clear on the basis that 'if it seems too good to be true, it probably is'

    The main 'Golden Rule' is to first look at how your capital is going to be preserved and paid back. Only when you have answers to that should you start to consider the rate of return. (Warren Buffett came up with that one).

    This is a community-generated list combining my own content with that of Pippllman, Sam Green, and Simon Allen.

    Related content:

    Ben Rogers  

    Anti-due diligence

    Dodgy deals from poperty gurus

    New free due diligence tool to research companies

    Advice on being a "silent" partner

    Overheard at a property networking meeting

    Before you invest ... invest-igate 

    Bankrupt wealth creation experts - should the property community care?

    Due diligence or die ... Lessons from Madoff disaster

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    I've been asked for advice on joint ventures a lot this week. There's a huge amount of negativity out there ATM about JVs but the debate is entirely helpful as it raises ppl's understanding of the right way and the wrong way to do business together.

    Here's a response I just gave someone and I hope others find it helpful too...

    Problems arise when there's no distinction between turnover and profit.

    In my view it's the 2nd rule of business - don't confuse turnover and profit. The 1st rule is know when to quit / continue.

    When ppl JV there should be fees to cover costs such as sourcing / deal packaging, project management, LENDING - this is turnover and should contain little or no profit.

    What's left over is genuine profit to be shared according to demand - whoever wants the deal the most, will give up the most.

    The cost of the equity that's invested is opportunity cost. Applying this cost (interest) also motivates the developer to be efficient. Time is money.

    When BMV is nothing more than below asking price it becomes completely meaningless. Asking price can be any number the vendor wants - BSMV! It means very little and only motivates the developer to find greedy or unreasonable vendors so that "discounts" sound artificially impressive.

    Feel free to point out anything I've inadvertently omitted Smile

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    Thanks for adding additional valuable comments Matt.

    Two more golden rules to adhere to!

    Sue Elkington - who has undertaken over 130 refurbs in 42 years, also shared very similar advice.


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    Most of us are little people and just cannot afford to lose such large sums of money

    I wouldn't care if I was offered 20% interest

    I would keep it in a savings account paying 1%

    In my very bitter experience it is the case that you just shouldn't trust JV partners

    As has been suggested if a bank won't lend them the money then you don't want to have anything to do with such people


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    Very good advice

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    Andrew Taylor

    Brighter Living Property - Giles Homes - RG Taylor Engineering - The Taylor Family Trust.

    It's very good advice Vanessa. Wh I starte doing JVs I thought very long and hard and decided that my first JV partner was so experienced that it was worth the risk to partner with him to learn. That said I d extensive research on him, spoke to his employees, went to dinner with his wife an met his children before we went into partnership together. Thankfully it went well and we're now doing our 6th project together.

    I have other JV partners who also partner with me to learn so w can't overlook this valuable reason. It's much cheaper to JV with with experienced investor and make a return (hopefully) than paying someone £30k to mentor them.

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    East London based property developer, investor and speaker

    East-Eight.com

    Follow Me: Facebook Twitter Snapchat

    Two sides to every story....


    I think Nicole and Vanessa cover both sides well. The risks certainly outweigh the rewards in a lot of cases, both for the investor looking for a passive income, and also for the developer who may be getting in over their heads.


    We work with a small number of wealthy investors rather than trying to borrow £10k from anyone who'll listen.  This has worked well for us.  The investors wouldn't be hurt significantly if we defaulted, which puts us at ease to an extent. There are les relationships to manage and less emotion to deal with. It also means we can focus on finding and developing property rather than having to constantly be looking for the next investor, distracting us from what we should be doing.


    In most cases, the investors approached us initially, and we work on several deals with the same people.  There is of course risk involved for them, and the thought of being discredited is enough to keep me focussed on doing what I promise.


    One question Vanessa asked is 'why do they need your money'?  Well for me, it's simple. I've been investing in property since I turned 18, and over the course of 10 years I'd say I've got reasonable experience in the area. But I've also enjoyed a lot of our profits - holidays, wedding, house etc.  Maybe not the smartest financial move, but we only have one life, I'm going to enjoy mine.  I made the decision to leave the corporate world to focus on property full time, and the involved ramping up the number of investments we were doing. I simply didn't have the funds to finance all the deals I wanted to do myself. I'd rather have 50% of something than all of nothing, and sadly I'm not at the stage where the banks are throwing money at me.

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    Mike Stenhouse Host of The Inside Property Investing Podcast

    Nicely put Mike!

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    Carl Henry Property Limited - PropTech, Deals, JVs, Free Training, Tips & Help
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    Comment from Nicole Bremner on another thread about how to set up a JV partnership in a robust manner:

    "The structure I use is that we set up an SPV and the shareholders agreement is the contract between the JV partners. It can be really expensive to draw up these. I paid £3.600+VAT but other solicitors would have done it for less".

    The costs of such legal work should obviously be factored into your profit calculation.

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    I am just adding this video where Nicole Bremner shares her top tips for profitable and harmonious JVs:


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    Thinking of doing a JV with someone, this person currently owns no property so would be his first (therefore avoiding stamp duty). We both have enough money to buy this particular property together so thought of a JV. He suggested buying in his name to avoid stamp duty (as I own other properties), however Im a bit worried, how can I make sure that the property is just in his name while at the same time having security on it. Basically we were thinking of buying ad flipping this particular property.

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