Hard Money Lending: Do’s & Don’ts

[Mark Gaskins]

Going through a traditional mortgage or conventional loan is pretty straight forward. But, private or hard money just sounds like Lucky Luciano will be knocking on my door asking for double the interest....Does the old saying “all money ain’t good money” apply? How do I vet my options between on or the other?

[Jeff S.]

“Generally speaking hard money lenders are smart businessmen who are making money with practically zero risk.”

What a cynical and uninformed post, @Dan M. You don't seem to have much respect for money or how it's earned. Ask any HML survivor how they did in the 2008 melt-down and if they agree with your statement about risk.

The comment that an HML will keep the house if you don't pay them in say a year is just flat out wrong. This shows a lack of knowledge about the foreclosure process and how it works. HML's are in the lending business. They do not want your house. If they wanted to own houses, they have the money to buy them without the headaches of a foreclosure.

Cynicism aside, @Mark Gaskins, here’s an actionable list of Do’s and Don’ts that might be helpful to you. It also points to some links that offer questions you can use to vet potential lenders.

DO

1) Do start looking for money now. Yesterday would have been better. Do look for money as aggressively as you look for properties.

2) Do stay off the internet when looking for a lender. This is a business based on personal relationships. Real estate clubs are a good place to start because you can get an initial impression of each other face-to-face and get your initial questions answered.

3) Do prepare a list of informed questions for your prospective lender. Here are a few posts that could help:

Questions for Hard Money Lenders

How to Vet a Private Lender

Due Diligence on Private Lenders

4) Do know and be able to defend your numbers on any property. Your lender will do an independent evaluation anyway and should be happy to share their opinion and their spreadsheet. This is a benefit to using and HML since they don't want to lose money any more than you.

5) Do borrow as locally as you can. Forget web-based sellers of lender lists, most/all of which are scams, and multi-state far away lenders, who likely have no understanding of you or your area and might not be sympathetic to any problems you might have after you’ve borrowed the money.

6) Do understand licensing and usury requirements in the state the property is located, at a minimum. This will help you determine if a lender is legit and knows what he or she is doing. (You’re not using an out-of-state lender, though. Right?)

7) LinkedIn, Craigslist, Facebook, Connected Investors, and the like are cesspools of scammers. Do you know how to tell with some certainty if someone is an online scammer? When you figure it out, would you please let us all know?

8) Do obtain independent references and referrals from other borrowers as best you can. Understand of course, that borrowers often hold their best lenders as close to the vest as possible. Local real estate club owners are another resource you can ask for lenders with a good reputation.

9) Do maintain a stable of vetted lenders you can pick and choose from as your properties, and their criteria, fit. Lending criteria from private lenders are generally as different as fingerprints.

10) I don’t care how big they seem, until they’ve proven themselves 110% reliable, do make sure your lender has the cash available to lend. If they say they have to rely on an investor to fund, or another deal to close before they have the cash, then pass.

11) When it comes time to repay, do check all closing calculations. Most people are honest, but everyone can make a mistake. It astonishes me how few borrowers do this.

12) State-specific but do use an experienced, appropriately licensed and experienced Hard Money Lender or Broker to originate your private loans thru either escrow, title, a closing attorney, or however they do it in your state. Hard Money Lenders are experienced with private money. They will have vetted paperwork, and the experience to evaluate you, your deal, and your private lender if they are not experienced. Many, but not all HMLs & brokers will do this for a nominal fee that you will pay. This will protect you and an inexperienced lender, if that’s the direction you’re going. Ask around.

13) Do what you say, show up on time, return all calls, and pay all bills when due. Did I really have to say this?

DON'T

1) Don’t agree to pay any up-front fees. These are almost always the tell-tale sign of a scammer but if legit (most are junk fees) these should be paid only at closing, when your lender performs. Appraisal costs paid directly to an appraiser, and perhaps a nominal credit check fee, are the only exceptions.

2) Don’t overpay for a property, compromise your expected returns, or ever feel desperate to do a deal. Similarly, don't subscribe to the myth that if you find a great deal, the money will somehow appear. This is the garbage pedaled by gurus.

3) Don't think the numbers won't apply to you or that they will somehow work out. You are not exempt from losing money. You’ll understand this the first time you sell a property and have to bring a check to the closing table.

4) Similarly, don’t ask a lender to loan on a substandard deal because you’re either having a hard time finding properties or you want to take an unusual risk.

5) Unless you’re just asking for some friendly advice or info, don’t present deals you do not have under contract. The cold reality is that many/most deals you believe you’re 100% certain to obtain, will fall through.

6) Don’t ever ask anyone who is inexperienced to loan you money in second position.

7) Don’t do business with friends or family. Nothing will forever change a relationship faster than when money is involved. Losing the money of a family member will make for many uncomfortable Thanksgivings.

9) Don’t pool money from several investors. This requires a security exemption.

10) Don’t come here asking if Peter Pauper from Peoria, who just sent you a copy of a driver’s license and some BS paperwork, is a legit lender in your state. If you have to ask, he’s not – and you knew that. (You’re not still willing to borrow money from a stranger on the internet, are you?)

11) Don’t give out any personal info until you are 100% certain you know with whom you are dealing and how they will protect that info.

12) Don’t give out any personal info until you are 100% certain you know with whom you are dealing and how they will protect that info. Yes, I wrote that twice.

13) Don't fall into the myth, often repeated here, that there is any legal difference between a Hard Money Lender and Private Lender. These are marketing terms representing non-conventional loans. The same lending laws apply whether the loan is from your Aunt Mildred or a giant mega HML at a fancy address. If you insist on borrowing from Aunt Mildred, make sure she is as secured and protected as the giant mega HML would be.

14) Similarly, don’t think that a properly originated loan consists only of a Note and Deed-of-Trust or Mortgage. This is frequently stated on this board by very knowledgeable and astute real estate investors who don’t fully understand lending.

15) Don’t get lending docs from a title company or (yikes!!!) off the internet. You have no idea what you are using. Protect any inexperienced lender.

16) Don’t get your lending or borrowing advice off the Internet. Especially from me!!! This is why Lending Lawyers were invented. Understand that real estate lawyers and closing attorneys are not Lending Lawyers and that most are only used to conventional loans.

17) Don’t play games. If you agree to do a deal, do it, and expect nothing less from your lender.