Wednesday, February 24, 2010

Risks of Being a Credit Partner

What if I partner with an investor who fails to fulfill their promises?

Whenever I lend or borrow money, I try to secure my financial pledge with a promissory note and some collateral, in this case a lien on the subject property. If my partner defaults on their payments, then I have a legal right to foreclose on the property. When I work with a credit partner, they have paid nothing out of pocket, but have the right to foreclose on a property should I fail to make payments as promised.

If your partner is promising to cover payments through rental income, then it would be important to ensure that there is a legitimate long-term lease on the property, or that your partner has a good track record of property management. If not, you may want to hire a property manager, or seek their opinion on the potential rental income on the property. I find that does a pretty good job of estimating median rents for property.

But what if I have to foreclose?

If you have to foreclose, hire a good real estate attorney and have them handle the details. Expect to spend $2000-4000 in Washington state (a non-judicial state) to handle the foreclosure. This may not be a bad price to acquire a property for which you originally paid nothing. Make sure you have access to funds should this become necessary.

In working with a partner, be sure to always do your own due diligence. Hire an attorney to draft and/or review any legal documents; and be sure to get references on your partner, especially if you have not worked with them before. Most investors are small business owners and entrepreneurs who are looking for venture capital to expand their business. And ideally, your deal is structured in such a way that makes lending money or credit a win-win for both of you!

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