Due Diligence Before You Lend: How to Protect Yourself and Your Capital

Private money lending can

be a powerful wealth-building strategy—but only when approached with intentionality and protection. At Grit & Polish, we’ve seen too many smart, well-meaning women lose money because they trusted someone’s personality over their paperwork.

The truth? It’s not enough to look at the potential return. You must do your homework.

Research Before You Lend

1. Vet the Individual and the Entity

Before you lend a dollar, be sure you know exactly who you're dealing with.

• Obtain full legal names, including any previous names or aliases.

• Determine whether you're lending to an individual or an LLC—and who owns the LLC.

• Investigate the full ownership chain if there are multiple layers of LLCs.

• Confirm that this is not someone cycling through failed entities.

  
  

2. Check Their Credibility

• Search for complaints through your

Protect yourself by verifying the borrower’s background.

• State Attorney General, the Better Business Bureau, and online court records.

• Look for patterns—especially lawsuits from previous investors.

• Run background and bankruptcy checks across multiple states.

• Ask for a current personal financial statement to understand their financial standing.

  
  

3. Review Their Track Record

Experience matters, and it must be proven.

• Ask how many properties they’ve flipped or managed and in what capacity.

• Request documentation: purchase and sale dates, profit numbers, and proof of ownership during that time.

• Require before-and-after photos or videos that validate their claims.

  
  

4. Verify References

Don’t settle for vague or biased praise.

• Ask for references from other private lenders—not friends, family, or business partners.

• Cross-check that references aren’t co-owners or partners in the borrower’s LLCs.

  
  

Understand the Local Market

Even the best borrower can’t overcome a bad location.

• Research local trends: crime, saturation, pricing, and resale velocity.

• Use online tools like Zillow, but also speak with local agents, contractors, or property managers for deeper insight.

• Confirm whether the borrower owns or plans to purchase the property.

• Visit the property yourself or hire a neutral third party to verify its condition.

• Check whether the area is in a historic district, which may limit renovations.

• Review recent home sales activity on the specific block—not just the zip code.

  
  

Understand the Legal Landscape

Know the legal implications if the deal doesn’t go as planned.

• Research the foreclosure and eviction process in the specific county.

• Determine whether the state allows deed-in-lieu of foreclosure or other faster recovery methods.

• Understand super lien priorities, especially for taxes, sewer, and HOA dues.

• Ask whether mortgage holders are notified when taxes or HOA dues are unpaid.

• Learn how local courts handle investor vs. consumer foreclosures.

  
  

Build a Reliable Team

Lending safely doesn’t happen in isolation. It happens when you have the right professionals in your corner.

Your Team Should Include:

• A real estate attorney in both your home state and the property’s location

• A CPA who understands real estate lending, entity structure, and taxation

• A neutral inspector who will assess property condition and rehab progress

• A real estate agent familiar with the area

• An insurance agent who can confirm borrower coverage and ensure you are listed as the mortgagee

• A reputable self-directed IRA custodian, if you're lending through retirement accounts

  
  

Additional Legal Support:

Even if not on retainer, you need a go-to attorney you can consult before problems arise. Make sure they’re not connected to the borrower.

CPA Guidance:

Ensure your CPA is involved in structuring your deals for optimal protection and tax efficiency.

Insurance:

• Confirm the property is fully insured.

• Ensure you are listed as mortgagee.

• Ask to be notified immediately if the policy lapses or is canceled.

  
  

Inspector:

City inspections are often superficial. Hire a professional you trust to validate progress before releasing draw payments.

Secure the Right Legal Documents

Having the right documents in place is critical to protecting your position.

Promissory Note:

• Clearly outlines the loan amount, interest rate, payment schedule, and any draw disbursement conditions.

• Includes provisions for late fees, attorney’s fees, and borrower default.

• May include terms allowing or prohibiting additional loans or extensions.

  
  

Mortgage or Deed of Trust:

• Must be recorded in the correct county.

• Grants you the legal right to foreclose if the borrower fails to repay.

• Confirms your lien position and outlines rights and remedies.

  
  

Personal Guarantee:

• Always request one—even if the borrower claims to have minimal assets.

• Adds leverage in the event of default.

• Request an updated personal financial statement annually.

  
  

Other Key Clauses to Include:

• The right to inspect the property with proper notice.

• Authorization to winterize or secure the property if abandoned.

• A due-on-sale clause, which triggers default if the property is transferred without your permission.

• Explicit definitions of default: unpaid taxes, mechanic’s liens, unauthorized mortgages, etc.

• A clause allowing for cross-collateralization (securing your loan with another of the borrower’s properties).

• Clarity on escrow terms, lien releases, draw procedures, and contractor oversight.

Additional Watchouts

• Only lend what you can afford to lose. This isn’t about pessimism—it’s about prudence.

• Don’t get emotionally sold. Many borrowers are persuasive and likable. That doesn’t replace proper vetting.

• Always assume the worst-case scenario. Could you take over this property if needed? Are you prepared to manage or complete the rehab?

Final Thoughts

Private money lending isn’t just about returns—it’s about risk management. As the lender, you are the bank. And banks don’t move on feelings—they move on facts, documentation, and due diligence.

Whether you’re lending $25,000 or $250,000, your capital deserves to be protected.

Want to go deeper? Join Women Flipping the Script Facebook group at https://www.facebook.com/groups/womenflippingthescript, or download our free Due Diligence Checklist at gritandpolishcoaching.com/resources.

It’s time to lend with wisdom, not worry.