Vetting Hard Money Lenders?

Question

Hello all,

I'm still new to the forum and have been digesting a lot and am thankful for all you provide. Today I'm wondering how do you vet hard money lenders. Do you have a specific checklist you follow as you would maybe a tenant?

Along with this question would you recommend hard money lenders to someone implementing a buy and hold strategy and renting their properties? Seems to me hard money works best for rehab and refinance programs.

Arpan Patel · Answer

I do have somewhat of a check list. Here is what I typically ask or search their website for answers:

1) Points

2) Interest

3) What % do they loan on the cost of the project

4) What % do they loan on the ARV

5) What minimum amounts do they loan if applicable

6) Can they loan specifically where you are looking?

7) Are there any other considerations that could bring their points or interest down? (some lenders knock off a point if you are in their butternut area)

8) What are the start up fees? (Typical property evaluation fees, one time set up fees)

9) How much do draws cost?

10) Do they have a 3 month prepay at close so you are not out that money later

11) Can they roll points and fees into the loan amount?

12) How does the tax credits work when you are purchasing (some lenders see that your total cost of the project goes down so they don't give you credit for the full amount but others say, that is your fully your credit because you will need to pay taxes later)

13) Do they charge interest on the full amount of the loan right away or will they only charge interest on the money you have received?

14) How fast can they close

15) Do you pay for any of their fees? (One lender make me pay for their attorney every purchase side of closing)

16) How fast are the draws? (Normally a 3 day turn around from when the inspector is onsite to when the money is in your bank)

17) What does the draw process look like?

18) What documentation do you require for the deal? (They all have a deal sheet, title, insurance but some also want a survey and or a home inspection)

19) What corporation docs do you require?

20) Are there any discounts for credit scores?

That is basically all the questions I ask or search their site for but not necessarily in that order. I hope that helps!!

Ann Bellamy · Answer

While this is a great list to ask any lender you are considering, an even bigger, and often overlooked consideration, is how reputable they are.    And asking this question of the lender is not going to generate useful information, for the most part.  :-)

Here are some things that happen:

• Lender commits money not yet in their bank account in anticipation of a payoff from another deal.  Payoff doesn't happen.  He can't close you loan, or can't fund the construction draws quickly.  
• The loan docs when you get to the closing table reflect different terms, (or additional fees) from what you thought you agreed to.  It's too late to find another lender at that late date, so you close anyway and you're sorry later.
• By the same token, something that you didn't anticipate due to inexperience, can be common practice.  Your lender doesn't know the extent of your lack of experience, so assumes you know that you have to pay lender's title insurance, for example.  You are angry, but really, it's normal in every transaction.  So ask if there are any other costs that you didn't think to ask about.
• The lender is simply a lowlife (unfortunate but true, just like in any group of real estate investors, there are a few bad apples) and is out to take you for anything he can get.  For the most part, this doesn't happen, hard money lenders are not mob-connected loan sharks with baseball bats.

The way to avoid points 1, 2 and 4 is to ask around for references at the local real estate groups, or here on BP on the local forums.  Also, google everyone, you'll be amazed at what you find.  On the flip side, realize that an occasional bad review can simply be the result of someone's personal inexperience, or a personal vendetta.  Take the majority view of people who have done business with that lender, not just gossip.

Lauren Lockett · Answer

Try searching "hard money vetting" or "hard money questions to ask" to see if you see any other posts about this question as well. I can only imagine it comes up pretty often here!

Arpan Patel · Answer

Agreed! Good stuff @Ann Bellamy

Jay Hinrichs · Answer

@Ann Bellamy  good points Ann

Ibn Abney · Answer

Hello,

Can anyone recommend a HML who writes loans in the cincy area? Look at a duplex or triplex.

thanks,

Bryan Wilson · Answer

@Arpan, much appreciated. This is a tremendous list you pulled together. Thanks!

Turner Simon · Answer

Hard money is a term used for loans that are backed by the physical real estate, usually coming at a slightly higher interest than a typical commercial or residential loan type due to the higher risk and shorter term period.  You are right, hard money is most used for rehab or shorter term "bridge" scenarios, so for a buy and hold strategy you really want a long term permanent loan, fully amortizing.  Do you have a specific project you are looking for? I may be able to help or direct you to someone who can... feel free to PM me

Vetting Hard Money Lenders?

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