How to Conduct Due Diligence Before Privately Lending Your Money

The following is adapted from This Sh*t Works.

You wouldn’t give your money to just anyone you pass on the street. So why would you lend money without first assessing the quality of the borrower?

Doing your due diligence is a critical part of the private lending process to minimize your risk and increase the chances of a profitable outcome.

Whether you’re investing your capital with a borrower who’s out of state or someone who works in the same building, you want to make sure they’re reliable borrowers who won’t likely default on their loan. Where would you start figuring that out? 

There are a number of ways to conduct due diligence, but perhaps the most available and immediate options are going online, conducting personal interviews, and talking to references. Each activity will give you different information that adds to your understanding of potential borrowers and informs your decision to invest with them.

Research Borrowers Online

The first place you should research potential borrowers is the internet. You can start conducting due diligence immediately simply by searching for their name on Google. 

You can find out all kinds of things about people by using Google. Do they have any legal judgments against them, any lawsuits, any zoning issues, any issues with the community or the Board of Realtors?

You can also go to Facebook profiles and get an idea about the person’s character and who they hang around with. You might be surprised by what people are willing to share publicly online. 

People often don’t realize the opportunities available to do their own online research, but if you want to explore someone’s history further and deeper, you can also hire an experienced researcher. 

Conduct Personal Interviews

The next avenue to follow for due diligence is conducting personal interviews. Think of this like a job interview. Request the borrowers’ resume, which should show all of the projects they’ve done, their transaction history, and credit report, as well as business references and personal references. 

This should not be a surprise request for your borrowers. They should have this ready to present. If they don’t have any of it, or don’t want to share it, you have no business considering investing with them. Once you have all of this information, you can start your interview process. 

Whenever possible, make this a face-to-face meeting with your borrower. You should get to know them and not just what they know about the specific real estate investment. What’s their background? Have they always been in real estate? Have they run a business before, or is this their first time? 

Don’t be afraid to ask questions. This is your money you’re lending out, and you deserve to know who’s getting it. 

Speak to References

Lastly, talk to other people who have been lending money to this borrower. Get half a dozen people who are doing business with them now and people who have done business in the past. 

Your aim is to lend to people who have good character, not a bunch of partnership or business breakups because they couldn’t communicate. Look for long-term relationships. Your borrowers should be people who know how to deal with people, who can solve problems. 

Good collaborators are where opportunities come from, so look for that in a borrower. You want to work with people who are on time, who don’t have too many issues with their buyers or renters, and who know how to run a business. Past business associates and acquaintances should be willing to give your candidate an endorsement—or, if warranted, give you a warning. 

Be Selective about Your Borrowers

Throughout this process, remind yourself to be selective about your borrowers. Private lending will not be a good investment for you if your borrowers end up defaulting on their loans. It will only bring you income if you choose trustworthy, business-savvy, and responsible borrowers to invest in. 

The best way to find these high-quality borrowers is by doing your due diligence online, in person, and through their references. They’re out there waiting for you to connect with them—all you need to do is find them. 

Be as scrupulous as you would when hiring a new employee, and you’ll likely weed out the risky borrowers and draw out the winners. 

For more advice on real estate investing, you can find This Sh*t Works on Amazon.

Kent Clothier is the CEO of Real Estate Worldwide, a software training company for real estate investors, and the founder of the Boardroom Mastermind, the most elite real estate investor networking group in the country. He’s flipped thousands of homes over the past fifteen years and helped tens of thousands of people learn how to do the same. He is passionate about teaching what he’s learned in a simple way so that it’s easy for anyone to connect the dots. As a husband and the proud father of three amazing kids, Kent has built the ultimate life for himself and his family.