(1) Never close a loan without title insurance or without a up to date hazard insurance policy in effect listing you or your entity as loss payee.
(2) Never close a loan leaving property taxes unpaid and we recommend if the borrower is behind on taxes at the time of the loan you should escrow 1/12 of taxes each month and collect with monthly payment.
(3) Never lend on property for which labor and/or materials have been provided within 90 days prior to closing without either (a) having an extended ALTA policy of title insurance with no exception for labor and materials liens (difficult to get), or (b) having received a signed affidavit from the borrower which lists all providers used (along with contact info and the amount of any outstanding debt), and contacting all labor and materials providers on the list to make sure that none is preparing to file labor or materials liens.
(4) Never close a loan secured by property which appears to show (by inspection, general observation, public record, or known history) a reasonable possibility of being contaminated by any form of hazardous waste, unless you have seen a current level I or level II environmental study showing the property to be clean. And in any event, always require borrowers to sign a hazardous waste indemnity agreement.
(5) On a construction, rehab, or development loan: never disburse funds for work that has not been completed (unless as a deposit to a company that has been carefully checked out and is considered to be highly credible) and never disburse funds directly to the borrower unless as reimbursement for work that has already been completed and paid for, and which is documented accordingly.
(6) Never lend 100% of purchase price and repairs, this leaves you lending to borrower with no skin in the game. If the property does not sell or renter stops paying you could be left having to foreclose. Now the borrower will tell you the loan to value is 65% so you have plenty of equity in case of default. This maybe true but if you add in the cost and time of foreclosing and the discount you may need to offer to sell property quickly. You could break even or possibly lose principal. Our belief is that the borrowers must have skin in the project at all times we are lending to them.
(7) Never send monies to loan officer, mortgage broker or real estate agent for loan closing. All loans must close at title or escrow company and money only sent to title or escrow company.
There are many other dangers and pitfalls to investing in the lucrative world of mortgage investing. I’ll gladly crank out another seven or eight if you would like for me to expand on any particular item on the list.
To read the complete special research report on “The 7 Biggest Dangers when Investing in Mortgages and what you must know to protect your investments today!”