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 rentometer.com 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!

Promissory Note and Terms

Promissory Notes Tutorial
Some simple term definitions will help you approach the use of promissory notes with confidence, and at least the illusion of expertise. First, the maker or payer of the note is the borrower who executes the note. The payee is the lender. Both payer and payee must sign the note before it can be legally executed.
The promissory note will set forth the loan amount and terms, interest rate, method and timing of repayment as well as the payer’s promise to repay. With a deed of trust, the note may state that it is payable to the bearer. If used with a mortgage, the note may state that it is payable to the mortgagee. The mortgagee is the person who holds the mortgaged property as collateral for the loan. Other items stated in both those documents may be restated in the promissory note including charges or conditions for late payment and default, as well as notifications and cures for default. Specifics on the right to prepay the loan balance and also any other charges the payee may receive should be spelled out as well on the promissory note.
As in other negotiable instruments, the promissory note may be assigned to a third party who then has the right to the borrower’s periodic payments. In other words, a note may be sold to another party.