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The Private Lender Podcast - Keith Baker 8th April 2019
PLP-065 Late Penalties And Why You Need To Enforce Them
00:00:00 00:20:18

PLP-065 Late Penalties And Why You Need To Enforce Them

PLP 65 | Late Payment Penalties


Many people get struck by the question from private lenders about utilizing their right to charge penalties for late payments and to which extent. Two of the facts to remember are there is a late payment after the grace period legally stated in a signed contract, and the promissory note backed by the deed of trust fully allows the lender to charge a penalty. Today, we dive deeper into defining, utilizing, and threatening penalties for borrowers who are late on their payments. Off the topic, we will also reveal why you should start listening to The MFCEO Project Podcast by Andy Frisella.

Listen to the podcast here:

Late Penalties And Why You Need To Enforce Them

Penalties For Late Payments Plus Why I Listen To The MFCEO Project Podcast By Andy Frisella

Let’s go ahead and jump right into our topic which is going to be about defining, utilizing and threatening penalties for borrowers who are late on their payments. If most of my payments from my loans are due on the first of the month, there’s going to be a three to five-day grace period after which they haven’t paid, the payment is considered late. There’s normally a percentage of that payment, a penalty like 5% or 10% for example. We’ll get into the legal aspects of it, but to explain what we’re going to do now, I want to put it out there. There’s a late payment after the grace period. Legally by contract, by the documents, the promissory note backed by the deed of trust allows the lender to charge the penalty. There was a question of when to use them and it struck me oddly because my immediate answer was always.

If I miss a payment, I get dinged somehow in some way, whether it is a credit card or mortgage, a car payment or any agreed installment payment. If I don’t make it, I get dinged. I was like, “Why wouldn’t you think about that?” “I’ve made this loan to a friend.” I’m like, “There you go,” it was a friend first and that’s the basis of the loan. What’s the number one pillar? Never lend any money to a friend or family member who is in need, but rather give them the money without the expectation of it being paid back. These are the contingencies you have to plan for and the stresses you can mitigate ahead of time by to rules and not loaning to friends. If it’s a good deal, set them up with somebody that’s willing to lend or someone that it might be a symbiotic relationship. It’s like doctors don’t operate on their own family. I take that same approach with lending because people get funny about money. It certainly can. Oftentimes, we do.

Right there is that rule why the pillar comes into place for me. “Do I always follow it?” “No.” We all got that one family member, that one friend we break the rules for. It’s not a judgment. It’s a reality. If you go into your lending armed with this attitude, then it’s easier not to feel guilty because you’ve set up your parameters. Those parameters are agreed to and then the other party fails to live up to it, you get to do what is allowable by contract. That includes not just a foreclosure but charging for late payments. Let’s go ahead and jump into the legality issue of this. I’ve only done this in the state of Texas. I only am speaking from the state of Texas. Wherever you are, I will defer to an attorney who’s licensed with your state bar who does real estate transactions as their primary mode of earning money. This is why having several attorneys on your team is good.

Penalty Rates: How Much To Charge?

Oftentimes, we take what attorney say as the gospel, much like a doctor or unfortunately like a weatherman. When those things don’t pan out the way we were told, we get upset and we blame them. It’s one thing to keep in mind, but it’s not a reason not to use attorneys. They’re going to be the closest to the court cases. They’re going to have the access. I’ll give you a prime example. I was looking back through some of my promissory notes and the lowest penalty I’ve ever been legally allowed to charge was 5%. It’s the lowest I’ve done. That was one of the early loans I did. I used the title company’s attorney, which again, I recommend you can. I have in the past, but that attorney doesn’t work for you. I like having attorneys that work for me to protect my interest. They don’t care about the title companies. They don’t care about the borrowers. They care about protecting my interests. That’s what you need.

Here I am reading a promissory note that was drafted by a title company’s attorney. The lowest was 5% and the highest was actually 15%, but that was to my partner Landon. I doctored the documents to see if he would catch it. You’d have to ask him if he did. Outside of that, the highest I’ve ever charged or been able to legal in the contract to the charge was 10%. I asked one of my attorney friends what is best. They have differing opinions but the answers are all in the same vein. The percentages may have been off a little bit. If you’re lending to a real estate investor, a rehabber or a flipper and you’re not providing a first lien for seller finance note down the line to the inline borrower. This is a business-to-business transaction, investor-to-investor transaction for a house flip. It is not a consumer loan. It is a business loan.

The protections aren’t necessarily the same, whereas if you were loaning somebody, knowingly lending to an owner occupant that you’ve put through and had them go through a mortgage loan originator. They’ve passed all the tests and paid all the fees and all that, but at the end of the day, that is a consumer loan. Consumers are extremely protected by the government. I’m not saying that’s necessarily a bad thing. Your average Joe on the street, I don’t know how much real estate knowledge they would have. Maybe that’s changed with all the television, but it’s a point neither here nor there. The point I’m trying to ramble through here is that as long as you’re staying away from the owner occupants, whatever the averages that you see in commercial loans, ask around and see what those penalties are. Go to your REIA meetings and ask what the penalties you are seeing for this loan or to hard money lenders. What are their penalty rates, is a great place to start.

Exercise Your Right To Charge Penalty

That way you can get in line with more the lending industry and that is looked upon differently than a consumer. Being in the lending industry and being a real estate investor, it implies a level of sophistication that would take somebody out of the average consumer category. The court expects a level of sophistication. With that sophistication, if you do something improper, you do something wrong or break the law, whether it is intentional or not, usually comes stiff penalties. Just because they’re not a consumer, it doesn’t mean you don’t have to worry about getting a slap on the wrist or more. You still have to worry about any repercussions. It’s a business deal, treat it as such. The question as to whether to use and charge the penalty or not, it’s going to be up to you. Make sure that mechanism is in place in your documents and that’s what your attorney’s there to make sure it’s in there.

A lot of times, you’ll get a doc prep form from your attorneys. It’s going to have all the information they need to know. Who’s the lender? Address? The borrower? Are they married? I make the borrower fill out most of it and then I fill out my info and I pass it on to the attorney so they can draft the documents. Sometimes those documents are blank. What percentage do you want? I write in as high as I can get. I’ll do 10% or 12%. One time, I showed my attorney from the 15% that I jokingly did to Landon. He said it depends. It’s not out of the realm for certain businesses in certain industries. You have to be careful. I have another lawyer friend who says, “Why risk it? Why don’t you mirror what the consumers are charged and dealt with and then that way you don’t have to worry about it.” That’s certainly another way of looking at it. I’m not here to tell you which is better. I like to use the late payment penalties. I want it to make it sting. I want to make the borrower have even more skin in the game.

PLP 65 | Late Payment Penalties

Late Payment Penalties: Never lend any money to a friend or a family member who is in need, but rather give them the money without the expectation of it being paid back.


My note is more important because you’re going to see people who their rehab is crumbling. You’d rather he takes it back and yet you catch him at Perry’s Steakhouse. I’m not talking about for pork chop Friday when it’s half off. I’m talking about prime time, Saturday night full portions reading the polka band in the corner. I don’t want that encounter at the steakhouse or the Sizzler or the Red Lobster or wherever. I don’t want to have that encounter. My penalties are there to let them know that I mean business. If you don’t follow the agreed contract, I’m going to nail you with this and it’s going to sting. It’s going to come out of your profit. Let’s assume it’s a profitable transaction. The road to hell is paved with good intentions. Things are going to happen and then it’s at your discretion to, “I’m going to waive the fee.”

The fee is going to be there by contract and it’s up to me to take it away. I have taken it away with folks before. If they’re up front and honest with me and they come to me ahead of time and say, “I might be late,” or whatever, “This is the situation.” The guy comes up to me and says, “I can’t pay you, Keith. I got to pay my child support.” I don’t like that answer, but that obligation’s a little bit more important than mine. Not much, but a little bit and that’s all it takes. I got my money a couple of weeks later and I told him to not worry about it. He put the extra money in with the late fee and I said, “Don’t worry about it.” He came to me ahead of time and he handled the situation like a business person.

At that point, it’s up to me to waive it and I waived it. Other people, I put the screws to them, especially if my involvement goes from passive to now I’ve got to get involved, I’m not a happy person. That’s why I like private lending. Let me do my work up front and then put the wheels in motion and then check the account once a month. If I’ve got to go chasing you and stuff like that, I’m going to put the screws to you because I can buy a contract. My lawyer has put together that contract at the expense of the bar. That’s the best. I would love to walk into Fidelity or Schwab or whatever and say, “These are the stocks I want to buy. I want to buy Berkshire Hathaway. I want to buy IBM. I want to buy that hot new Pot Stock,” and you’re going to pay the $1,299 commission for it. I don’t know any other way.

You’re going to do everything and you’re going to pay for it and I’m going to take the gains. I’m now so far down the tangent. I’m back in college somewhere drinking Lone Star beer. Always buy but automatically have all those penalties in place. Talk to your borrowers, “This is what I do. This is what I charge. If your payment’s due on the first and then by day five it’s late or day ten or whatever,” that’s another thing you need to talk to your lawyer about is the grace period for a real estate loan versus consumer. Talk that over with your lawyer. I can’t speak for that, but make sure the borrower is fully aware. Honestly, “Have you read every piece of paper in front of you at a closing ever, even on your personal residence?” “No.” If it was your dream home, he didn’t care. He said, “Let me sign. I want to get in there.” In my case, “This is the house the wife wants.” I won’t sit there and read everything and I’m an investor and I’m not proud of that. It’s embarrassing, but it’s the truth. Go walk through everything with them, lay it all out and don’t be afraid to use it.

Why Listen To The MFCEO Project Podcast

People come to you ahead of time and say, “This is the situation. I’ll work with you. You come to me, I’ll help you, but you leave me in the dark. God help you.” I’m going to wind down the show now a little bit off topic. Back in February 2018, right after I had started this show, I attended the Grant Cardone 10X Growth Conference at Mandalay Bay in Las Vegas. I saw a lot of people speak. I saw a lot of people trying to sell. I saw a lot of people successfully selling huge product, courses, and whatnot. I was there trying to take it all in. One of the gentlemen who spoke on stage, I remember they introduced him and I turned to the guy next to me and I said, “Who is this guy?” He says, “He owns some supplement shop or something.” I was like, “He’s here? Let’s check it out.” He comes out and right away my swag meters up. I’m like, “Look at this guy. Coming out on stage all strutting, thinking he’s badass.” He lifts some weights.

He’s not like Lou Ferrigno or Arnold Schwarzenegger back in Iron Man days. He’s a big dude. He starts walking around and talks about how he was in the bathroom before he went on stage and he finally goes, “There’s a paper towel from somebody who dried their hands sitting on the floor by the wastebasket.” He started his talk about how it’s the simple things like that. You’re not too good to bend down and pick that up even if it’s not yours. He started talking about the culture in his shop and his warehouses and his employees. What he tries to foster and how he does it and why accountability was key. I wish I could remember everything this guy said because I was very impressed. He won me over fairly quickly. I realized this guy’s not selling anything. It wasn’t a rah-rah speech like, “I’m going to make you a millionaire overnight.” It wasn’t like that at all. He talked about his podcast, so I looked him up.

The podcast was different, but it’s taken me about a year to go from casual listener to a daily listener. He doesn’t sell anything. If you are looking for not just motivation in business or investing or how to be an online marketer or how to use whatever how-to. If you just want to learn the basics from somebody who’s not trying to profit from it, there’s no course to buy. He doesn’t push his products from his other companies. He just has this podcast. It’s one of the reasons why I’ve gone sponsorless. I thought I needed that when I started off because that’s what the polished successful podcasts I was listening to and that I enjoyed. They all had sponsors, so that’s what I did. I spent a lot of time trying to convince people to become a sponsor and then keeping them sponsor and whatnot. It bogged it down and it got to the point where I don’t want to be that commercial, not yet.

Lender Nation, if you’re reading this, don’t get me wrong. Someday I hope to have a product that I’m proud of, that I can exchange with you for money. I want to profit. I am a capitalist. I have a philosophy degree, but I’m also a capitalist. At some point in time, I want to monetize this show, but it’s because of this guy. I might as well go ahead and tell you his name now. I’ve botched this but his name is Andy Frisella and his podcast is The MFCEO Project. When I say things like, “Leave a rating and review or go to the website and go to social,” Andy does something that is amazingly simple and yet amazingly effective at the same time. He says the podcast is not free, that he does charge a fee, but the fee is not money. The fee is if you find value in his show, in each episode, tell a friend however you want to tell them. Tell them on the phone, text them, email them or whatever. Tell them about The MFCEO Project.

PLP 65 | Late Payment Penalties

Late Payment Penalties: Use the penalty for late payment penalties to make the borrower have even more skin in the game.


Here’s a guy who’s not selling anything directly on his podcast. He’s not using his podcast to monetize anything. He gives advice and how-to stuff. If you want success, it’s not free. Freedom is not free, successes isn’t free. You’ve got to work for it. That resonates really well with me the way I was raised and how this show came together after I read The Richest Man in Babylon. Take one-tenth of your money and make it work for you. Put it to use. Find people who do whatever it is you want to invest in, trust them with your money and let them do the hard work. You work hard at your job. I’m doing insurance adjusting. I’m doing some real estate on the side and I work hard for that, but at the same time, I let the people who are dealing with the contractors make money for me. Do I make as much as them? No, I’m not as actively involved as they are. I don’t have a problem with that.

It comes back and I’ve been listening to it more and more. I’ve been listening to Vaynerchuk and a few others, but with Andy’s, it’s really there because you can tell he’s a passionate individual. I have not met him. I have no affiliation with him. I’m passing it on that I find a lot of value in his show. I figured I’d tell as many people as possible. Put it out there. Go listen to Andy Frisella at The MFCEO Project at iTunes or wherever there’s a podcast. Go listen to it. He is a bit of an acquired taste. I’m not going to lie. I’d appreciate it if you would. Outside of what I’ve gained and the value I’ve gained from The MFCEO Project and listening to it, the one thing I wanted to talk about Andy, that is the most amazing part. That’s the most amazing effect of him using this method of tell a friend. If you find value, please tell a friend. Tell somebody that might be able to use it or just tell anybody.

Put the word out there because he doesn’t have sponsors. He doesn’t charge. He’s not selling and this guy is number one in iTunes. I’m going to steal that from Andy, but I’m letting you know that I’m going to steal it. Tell somebody. Spread the word. Tell your friend. Tell your coworker. Tell your kid’s friend, make a kid uncomfortable. That’s the best part about being a parent of a tween. That’s all I ask, which is in line with what I’ve done in the past. I asked that you give me a rating and review because that certainly does help and it’s the quickest way to go, but I like the simplicity of it. I also want to thank you for your time and for reading. Until next time, I wish you a happy and prosperous private lending.

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