How do you vet private lenders?

Question

I'm talking to private lenders but I can't seem to find info on some of them.  BBB.org, reviews, etc.  Are private and hard money lenders required to have a license?  E.g., NMLS

How do you guys vet a lender to make sure they are legitimate?

For example, I'm researching Avalon Capital (referred by the seller's agent).

Edwin Epperson · Answer

@Miles Tiglao you are touching the tip of the iceberg of confusion within the industry of lending.  The variations of terms, and definitions between what is a Hard Money vs Private Lenders, and why when someone is told to look for "Private Lenders" they seem to be coming against the same issues for qualifying with a Hard Money.  Is there no difference and why does everyone's default statement say, "Find a private lender, they will be more favorable on terms?" when in reality that does not seem to be the case.  There is a third type of money out there, and I think it's more appropriate for what many RE Investing courses and Gurus teach and that's called Private Money or "OPM".  Now by definition, OPM could be a private lender, meaning they "Loan" you the money and it's secured to the property you are buying.  The problem is they don't know how to underwrite, vet the borrower, property or project, nor understand anything about mitigating risks and shifting those risks.  In the industry of lending they are not a "Lender" they are simple a capital provider, and investor.  When most experienced RE Investors or Gurus say, "Find a private lender" what they are actually saying is find OPM/ Private Money.  I have my own thoughts on why I think this is the worst advice ever, especially for newer investors, but I won't get into that here.  Rant over, now to address some of your questions.

#1: Are private and hard money lenders required to have a license? Whether someone needs a lic or not really depends on three primary factors; State, and Borrower, and Asset Type.  Some states require a lic regardless of borrower and or asset type.  There are approx 42 states that do not require a lic. if the borrower is an entity.  So HML and PL are not required to have a lic if they are lending in those states, as long as certain qualifiers are met.  This is where it can be tricky.  Some states require a lic, if the asset is a SFR 1-4 unit, regardless if the borrower or lender are entities.  Some states, such as mine in FL, will view a loan as a consumer loan (meaning the lender must have a lic. and met all the CFPB requirements to make a consumer loan) in the case the borrower was an individual, even if non-primary resident disclosures and B-2-B purpose loan disclosures were signed by the borrower.  A great resource to find out which states require lic. For a specific type of lender check out Geraci Law.

#2: How do you guys vet a lender to make sure they are legitimate? I actually posted a video on my company's page concerning this very topic.  It's a concern and one that many newer investors have concerns about.  If you want to watch the full presentation you can do so on my company webpage, but the highlights are this:RE Lenders require collateralRE Lenders require "Skin-in-the-game"RE Lenders ALWAYS mitigate risks, the primary way they do this, require more "skin-in-the-game" from the borrowerIf you ever find a "lender" that uses a "free" email service this should be a huge red flag.  If they are advertising to be a "private lender" yet they are not operating a company, big Yellow flag.  If they don't have a website (big yellow flag)/ social media accounts (small yellow flag) and a consistent presence (small yellow flag) then be more diligent, and ask for referrals.  If they are advertising themselves to be a "local private lender" but you can never get through to them on the phone, big Yellow Flag.  If you cannot meet with them, in person, a yellow flag, even Red in my opinion.  A True Private Lender values the relational aspect of the business, so meeting potential investors face-2-face is highly valued in our eyes.  Hope this helps, and best wishes and much success in all you do.

Jay Hinrichs · Answer

12 states require state license and NMLS for 1 to 4 unit regardless of owner occ or commerical purpose the rest of the states do not require license for HML to LLC for commerical purposes on 1 to 4 units  most of the states that require licensure are out west.

CA OR NV AZ etc etc.

Nick Belsky · Answer

@Miles Tiglao

I have found that Word of Mouth is great way to vet them.  Also, working with a mortgage broker helps too.  We know who are viable lenders and who are not.  There are thousands out there, so there is no way to know them all.  Many come and go all the time.

Cheers!

Ryan Deasy · Answer

@Miles Tiglao

no they do not need to have a license. best to get a HML through a referral. i am happy to share contact info

Miles Tiglao · Answer

thanks for all the input so far!

Mo Karim · Answer

Vet them out and read every single line of your loan documents. There are plenty of hard money lenders out there so make sure to shop around as well.

Eliott Elias · Answer

Call their references

Miles Tiglao · Answer

I'm trying to make a the jump from SFRs to Commercial MFR's.  But since I don't have renovation MFR experience, I'm getting dinged in experience.  And traditional banks have bowed out of a deal because of the deferred maintenance needs of the MFR.  I plan to use a traditional bank for the refinance but I just need to take the deal down for now.

Jason Wray · Answer

Miles,

why do you need a Hard money or private lender versus a Bank?  Are you trying to buy a property that is "Subject to" and not able to pass inspection?

How do you vet private lenders?

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