How to Evaluate a Private Lending Deal Before You Wire a Dollar
The Wrong Question Most Lenders Ask
How much can this deal pay me?
That is the wrong starting point. The right question is: what happens on the worst day?
If the answer is that your position is protected, that your lien is senior, and that the collateral covers your principal with room to spare, the yield becomes a secondary consideration. If the answer is that you would need things to go right, that is the answer that matters.
Private lending is not complicated. Protecting your capital requires discipline applied consistently before the wire is sent.
Step One: Verify the Asset Independently
An independent appraisal or broker price opinion based on comparable sales within the last ninety days. Not the borrower’s estimate. Not a number pulled from an online tool.
You are lending against a specific property at a specific value on a specific date. That value needs to be confirmed by someone with no financial interest in the outcome.
Step Two: Confirm Your Lien Position
A title search is not optional. You need to know there are no prior encumbrances, undisclosed liens, or judgments that would subordinate your position.
First position means you are first in line in any default or foreclosure. But it only means that if the title is clean and the recording is correct. Confirm both before the money moves.
Step Three: Assess the Borrower’s Exit Strategy
How does the borrower repay this loan? Refinance, sale, or cash flow? The answer needs to be specific and credible given current market conditions.
A borrower who cannot articulate a clear, realistic exit has not thought the deal through. That becomes your risk, not theirs.
Step Four: Stress Test the Loan-to-Value
What does this deal look like if the property declines fifteen to twenty percent in value? If your position is still protected at that discount, the deal has structural integrity.
Lending at sixty-five percent of a verified current value means you have a meaningful cushion. Lending at eighty percent of an optimistic estimate means your protection exists only if everything goes according to plan. Private lending is not where you bet on best-case scenarios.
Step Five: Review Every Document Before You Sign
Promissory note. Deed of trust or mortgage. Personal guarantee where applicable. Default terms. Cure periods. Reporting requirements.
Nothing proceeds without proper documentation. The instrument itself is the protection.
The One Question That Overrides All of Them
Would you be comfortable taking this property back if you had to?
If the answer is yes, the loan deserves serious consideration. If the answer is no, the yield is irrelevant.
If you are evaluating a private lending position and want a second set of eyes on the structure, reach out. No obligation. A 20-minute conversation to review the deal before you commit. Book at GualterAmarelo.com.
Further Reading
Why We Only Lend in First Position — A deeper look at what first-position status actually means legally, why second position is where risk concentrates, and the three structural elements that make a lien position genuinely safe.
The Banker Mindset: Why the Safest Investors Stop Thinking Like Operators — The identity shift that changes the questions you ask before any deal closes, and why the right question is always what happens on the worst day.
The Four Tiers of Capital: How Serious Investors Stack Their Money — How private lending positions fit within a complete capital structure and which tier they belong in to protect the portfolio as a whole.
