The Risk of Private Lending in Real Estate Investments: A Lesson to be Observed from the Epic Alliance Scheme

By Mirjana (Mira) Markovic

The concept of private lending is a familiar one to the vast majority of the Canadian population. Individuals at least understand the basic structure of this type of lending. To put it into perspective, private lending is a mechanism where an individual or private organization lends money to a person or corporation. These types of loans are common in real estate investments and are often used by investors to renovate properties for the purpose of resale or rental. Furthermore, they are not connected to a financial institution such as a bank, credit union, or finance company because they are unsecured and do not require collateral. Instead of relying on a borrower's assets as security, lenders issue unsecured loans based on a borrower's creditworthiness. Promissory notes and agreements between borrowers and lenders are the most common ways such loans are evidenced.

On the opposite side of the spectrum is a registered loan in which the lender registers a secured interest against a borrower’s asset(s), usually against real property. Such an interest is registered with the assistance of a lawyer. Once registration is completed, it gives the lender priority to recover the loan amount over unsecured creditors in the event that the borrower defaults in payment of the loan. This type of loan is recommended and is a safer option.

Let us take a closer look at the Epic Alliance scheme. Epic Alliance was formed by two Saskatoon women in 2013 and permanently shut down on January 19, 2022. The company offered the following services:

1. a “hassle-free” landlord program where they managed homes for out-of-province investors. Investors would purchase investment properties and the company would assume responsibility for finding tenants and maintaining the properties. The company promised a 15% guaranteed rate of return; and
2. a “fund-a-flip program”, allowing investors to purchase properties through the company with the stipulation that the company oversee improvements and upgrades and then sell same for profit.

On January 19, 2022, Epic Alliance completed a video meeting with all of its investors and advised that the company was shutting down and that there were no funds left. Investigators found that 211.9 million dollars invested in the company by multiple investors had essentially disappeared. Furthermore, the investigators could not locate vanished funds due to incomplete or distorted books. Settlement negotiations have recently commenced. If such does not prove to be effective in the next few months, the matter will proceed to trial sometime in 2024. The public has expressed its outrage as this situation is a clear abuse of funds and people.

I have completed numerous real estate transactions where third-party lenders loan money to sellers to renovate and resale properties. With this said, most of the agreements between the parties are evidenced via a promissory note which always gives me grave concern. When I receive documentation for such a transaction, a promissory note is always accompanied by the Agreement of Purchase and Sale along with instructions for the loan to be paid out with the proceeds of sale. Seems straightforward, but what happens when such a transaction fails to close? As I mentioned above, this type of loan is unsecured, therefore, the unsecured lender has no priority over a secured lender to recover the loan amount. In this case, the lender would be required to commence a court action against the borrower to recover the loan amount, which can be time-consuming and costly. I was recently involved in such a scenario. We could not initially complete the transaction because the purchaser could not secure financing. After nearly two months of negotiating, we were able to complete the transaction only because the purchaser was able to secure financing with a B lender. Otherwise, it would have been a very messy and expensive court proceeding. This situation could have been avoided if both the third-party lender and the seller (borrower) initially obtained independent legal representation to properly address the loan. 

In another recent matter, the third-party lender reached out to me directly. They were in the process of lending the seller money to renovate a property to be sold. The lender wished to discuss his options as the loan was over $100,000.00 and he did not feel comfortable proceeding unless his interest was secured. We registered a mortgage against the property pursuant to the promissory note which gave the lender a secured interest. Upon the sale, the loan would be paid out with the proceeds of the sale like any other mortgage and be discharged from title. My advice to lenders is simple: make it a common practice to reach out to a legal professional to discuss your options so that you do not fall victim to a scheme.

Below are some of my recommendations:

1. before you decide to invest money, discuss your options with a lawyer;
2. secure your loan via a private loan agreement instead of an unsecured promissory note;
3. if you are going to execute a promissory note, review it with a lawyer to understand the risks;
4. research the borrower thoroughly; and
5. always retain independent legal representation. 

Be diligent, educate yourselves, ask questions, and reach out to a legal professional to assist.

I hope that this article has provided you with some helpful information. If you have any questions, please do not hesitate to contact me at mira@sorbaralaw.com.