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Private Lending (12) – Lend to Friends?
I never thought I would make such a rookie mistake, and I’ve never relaxed any underwriting procedures to loan applications, but I still underestimated the impact of lending to a friend.
One deal was brought to me by a friend. They were flipping a small building on the West Coast, but the market wasn’t good, so they didn’t finish flipping it on time to sell, and they needed working capital to hold for a bit. When they reached out to me, even though we hadn’t been in contact for over a decade, the good memories from our good old student days came back and they were especially enthusiastic. The documents were submitted according to procedure, and there were no issues with the property, the loan, or the location. The price, term, and contract were all clear and straightforward. We approved the loan at a “friends and family” rate, and although the other party’s lawyer was a bit lackluster, we still took the time and effort to do a lot of the other party’s lawyer’s work ourselves. In the end, this deal was closed on time without triggering any penalties.
However, as the maturity approached, we followed the procedure and sent a letter inquiring about their discharge intentions. Perhaps thinking that friends are easy to deal with, they didn’t take it seriously. With little time left before the deadline, they suddenly said, “The property is still on the market, so just renew this loan for me, and I’ll pay you the interest.” We were at a loss. What did they mean by “pay the interest”? There are penalties for each step of the process if it’s overdue. Even if we renew the contract, we would have to go through the approval process based on the current market value of the property, which would cost both time and money. It’s almost impossible to complete the procedures by the current due date, and the interest is just one part of it. What about the reviewal fee? Are they just going to ignore it? Do they think there’s no cost to the funds? Saying they want to renew, and they’ll renew, saying they want to withdraw, and they’ll withdraw. Do they really think it’s cost-free money?
Of course I’m the one to blame in this situation per my team as they laughed hard at me this time. As I was the one who approved the loan, so I had to talk to my “friends” myself. They immediately started cursing at me, feeling that I was particularly ungrateful (because they couldn’t take advantage of us in the renewal situation), lacking in empathy, and insisted on adhering to the contract without any “flexibility”. After cursing, they hung up the phone.
Later on the day of the deadline, they found a new lender to pay back our funds, and we never heard from them again.
I didn’t feel any emotional attachment to the situation, but I was surprised. Even though everything had been explained clearly beforehand, and the contract was clear and binding, even though we were all adults and this wasn’t the first time they had borrowed working capital from other lenders, there was still an unrealistic expectation just because of our past relationship. It’s like if you didn’t allow them to take advantage of you, then you are the bad guy.
So later on, whenever a friend approached me, I stopped using my eager-to-please attitude. I simply said, “Send the documents to the office, and my teammates will handle them according to the procedure. If there are any issues, communicate with them.”
In the next post, I’ll talk about the deal that brought me closest to the FBI.