Private Lending: What I Do When Someone Does Not Pay
I invest often in secured Private Lending or Seller Finance real estate because I believe it to be the most passive forms of income available to me.
My upside is that I get interest income every month, just like the bank, and it takes very little of my time and attention. Plus, I am secured by a real asset!
However, the risk here is that the person on the other end might stop paying me.
And in this article I am going to discuss how I handle this circumstance.
First off, whenever I engage in a Private Loan, I ensure it is secured by a real asset contractually and that I have the right to foreclose on that asset if I’m not paid. It’s in my paperwork and it’s in black and white.
However, when this does occur, it does not actually mean that is the first thing I’m going to do as a knee-jerk reaction.
I hate not being paid.
So, my knee-jerk reaction is to call my attorney and find out my options and then call the borrower who is not paying me and threaten to forcelose on them or sue them. And sometimes this is the right move.
But with finances, my knee-jerk reaction is not often the right thing. Money is logical. Reactions are emotional. The two simply don’t mix.
While I do call my attorney and let them know what is going on and find out what my options are, the next thing I do is get in contact with the borrower and get their side of the story.
In this scenario, I believe there are two types of people:
- Those with good intentions and able to repay.
- Those with good intentions and no ability to repay.
- Those with bad intentions and able to repay.
- Those with bad intentions and no ability to repay.
The first thing I’m looking for is whether the borrower has good intentions or bad intentions. If they have good intentions and want to get back on track, and I believe they are sincere, I’m willing to work with them.
If they have bad intentions and are blaming others, avoiding me, making excuses, and not willing…then I’m not going to work with them and I will foreclose or sue. No questions asked.
Next I look at ability.
Do they have income?
Can they make partial payments?
Are they capable of getting back on track?
If yes, and they have good intentions, we are going to create a modified payment plan where I am still paid what I’m owed, but I might give them some flexibility to get back on track with me.
If they are unable to pay, but have good intentions, I will have a hard conversation with them and ask them to allow me to foreclose without bringing a lawsuit into the picture. If they’re good intentioned they’ll understand I can’t let them not pay me and they did agree that I could foreclose, and they’ll let me do what we agreed to.
If they are unable to pay and also have bad intentions, I’m suing them and going for whatever I can get.
If they are able to pay, but have bad intentions, I’m suing them and also looking to teach them a lesson and make an example of them.
You see, whether it is a family living in a home or an investor I’ve loaned money to, I’m not in the business of wrecking lives or using maximal force just because I’m contractually allowed to.
Can I?
Yes.
Will I?
When it’s needed, you bet.
But if I have a good person or good family on the other end of my loan who maybe made bad decisions or is going through tough times, I’m okay being patient with them and allowing them to get back on track, restructure things, or look at options where we both can win. Because I am not the type of investor who wants others to lose when they don’t have to.
I know I will get paid, I will also feel better about myself and I will have extended some grace and understanding to someone who probably needed it.
On the flip side, if I have to foreclose or sue, I will similarly still get paid, feel better about myself for taking action when it was needed, and taught someone a lesson who probably needed it.
I understand banks don’t work this way, but I am not a literal bank.
I invest and operate like a bank, which means we are similar, but not identical.
And the main difference is banks are in it for profit, at the expense of people.
I am in it for profit, at the benefit of people.
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To Purpose, Wealth & Freedom,
Jerry Fetta
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.
Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.
Learn more at www.WealthDynamX.com
(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)
