How to make sure a private lender is legit?

Question

I have been talking to several private lenders and for some reason I keep getting thrown for a loop. Everything starts off seeming legit and then things turn and I start second guessing the lender. I have found two that have offered me a 5% interest rate on the loan and are doing payments back like a mortgage where you can choose the years. But one I found I looked into their state business search and states the business is suspended, so of course the type of person I am I start questing this lender and she state that her company is struggling over ownership. That to me sends a red flag. What's your opinion? Also what have you came across for interest rates in your lender deals so I know what is realistic when talking to private lenders?

Darrell Shepherd · Answer

I pay my private guy 2 pts and 12%.  I started off back in the day paying high rates, I think I offered 20% on my first loan (it was a 2nd behind a sub2 to cover repairs and payments).  I had that down to 12% with no points before the crash.   Money was tight there for a bit so I offered the points and get great terms with my guy so never bothered to renegotiate.

4% is a dream.  Love it.

If you want to look at institutional, my primary lender is at 2.5% origination and somewhere between 8-14% for rate, depending on LTV and experience.

I generally get the bulk of the money from them and the rest from my PL on my deals.

I personally dont worry as much about money costs as I do about the availability of the funds.  After a certain point, of course.  Shouldn't be in the loan more than 6 mos. so I'm more interested in doing more deals than squeezing every penny out of one or two of them.

Ashley Parker · Answer

Thank you all for your responses! We have tried the relative approach with a previous deal and it just got to be to much. That is the reason for trying to reach out of the box now and see what we can do in the investor world and thank you for the link for the clubs.

Jeff S. · Answer

I can't imagine where you are locating these lenders @Ashley Parker.  Please don't say LinkedIn, Craigslist, or another anonymous place on the web. Here, you'll be promised anything you want to hear, which is usually a low rate and easy payoff terms, as much of this thread focuses.  This will eventually be in return for your personal credit information, and perhaps a healthy up-front fee.  Whether they seem to check out or not, don't put yourself in this position.

You're looking for long-term reliable money to build a business. As a relative newbie to flipping (I see in your profile you've done a few deals), your best bet in my view is to look locally at real estate clubs.  These will enable you to obtain personal references from others and meet potential lenders eye-to-eye.  Here's a list of real estate clubs in your area, from Meetup.com, that might be useful to you.

Until you’ve been around for a while and have developed relationships, or you have a really rich relative (which I'd never recommend), long term, reliable money will not be cheap money.  It will generally be obtained from legitimate, licensed, professional lenders who know the value of what they are lending to you and what the market will pay.  Your deals should be able to accommodate these costs.  Never overpay for a property hoping to find money cheap enough to justify the added expense.

While local rates and terms will generally be competitive with each other, wise flippers maintain a stable of lenders large and small that they can pick and choose from as their deals and the lenders terms fit.  If all you ask a lender are their rates and terms, you'll never know if they are legit, professional, and know what they are doing.  In fact, the only true way to know is to do a few deals, but this thread contains a lengthy list of questions you might ask a lender to vet them: Private Money Lender - How to Qualify the Lender?

Good luck, Ashley.

Brian P. · Answer

Where is the money?  Prove it. Put it into escrow. I have gotten private money from some strange sources and circumstances over the years, I just want to make sure it is in the pot for me to use, it belongs to who put it there, and I am the only one who can remove it.

Suspended business=non-existing business, I don't do business with things that don't exist.

Jay Hinrichs · Answer

@Ashley Parker

I like Darrell's response  its about deals and deal flow not how cheap you can get the capital.. you need experience then the cheaper capital will come to you.

I see so many people just wallow doing nothing because the are trying to find that grandmother that will loan at 5%.. and the deals just pass them up.

Private investors are the hardest to land unless you know them personally which you should.. if your cold calling private folks that can be a tough road to Ho..

Ashley Parker · Answer

Ok so there are people out there charging on the lower end of interest. From what ive read its normally 10-20% for rehab/flip. I was just curious. Thank you for your response.

Josh Caldwell · Answer

Red flags = walk away.   If they are having problems, there is no need to make them your problems.

A private lender can lend at any terms are rate that you can negotiate.  I have a lender at 4% straight inverest. I also have one at 10% compounding, guess which one I go to first?

To your success

Josh

How to make sure a private lender is legit?

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