How to Vet a hard money lender when investing my money

Question

I am interested in investing with a hard money lending firm, as in investing my own money to fund deals through them.
What steps should I take to vet this lending firm?
I've spoken with them, seen examples of previous deals, I understand how the business works, etc. I guess I am wondering what else I can do to verify that the lending firm is solid?
To be clear, this is not to buy my own property. It is using my money to fund someone else's loan request through this hard money lending firm.

Thanks!

Jay Hinrichs · Answer

really depends on who much capital you have.

those with small amounts of capital >100k  might invest with a HML who does not put you as a bene on the loan so your unsecured just in the deal.  Larger amounts you would be the sole lender and the sole bene so your secured and your HML is taking the points for their fees.

In CA you can do fractionalized loans were the Bene's are actually co beneficiaries with secured interest on the loan..

So make sure you understand the difference of how your loan dollars are or are not secured.

and then there are funds were your money is spread but your not specifically tied to a certain loan so in essance unsecured as well.

@Mike Klarman  gives a good outline of how the big box companies use all these brokers you see on BP as there lending agents .

Mike Klarman · Answer

Never, ever heard of a lending firm recruiting capital partners like that, so I'd be careful.  HML outfits usually have capital partners with deep pockets.  The way the HML industry works is that there are maybe 5 big box lenders that do the bulk of the HML biz.  The reason the industry looks so saturated is because you have thousands of broker outfits with lender sounding names selling the products of the big box lenders.

Is there true private money?  Yes, sure, people have wealthy friends/family or a wealthy coworker that likes to be the bank.  But you need deep pockets to be a private lender.  I mean a deal will cost you 150k in capital, maybe more.  To make what?  12% APR?  That's roughly $1,500 per month to you in interest payments.  Let's say they stay in the project for 9 months close to close. That's 13,500 you make in interest over the life of the loan, plus maybe two points origination so like 17k.  So to do this to scale where you're a lender with 4 - 6 of these loans going at once you'd need 750k - 1 million and you'd still find yourself out of capital for stretches.

Andrew Lax · Answer

Friend of mine invested with a HML in the same fashion... Not secured by the actual loan ... Made good money for a while then the market turned and he lost a lot of coin ...  If my name isnt on the Note then would not be interested.

good luck !!

Erik Estrada · Answer

Make sure they have a license. In most states, hard money lenders are required to be licensed.

Jeffrey Abraham · Answer

Thank you I'm trying to educate the beginning the best that I can.Thank you for the input you are 100% correct

Jeffrey Abraham · Answer

Steps to Vet a Hard Money Lending Firm

• Review Their Track Record:Look into the firm's history and reputation. Research their performance over the years and check for any complaints or legal issues.Verify the success rate of the loans they have funded. Request data on default rates and how they handle defaults.
• Look into the firm's history and reputation. Research their performance over the years and check for any complaints or legal issues.
• Verify the success rate of the loans they have funded. Request data on default rates and how they handle defaults.
• Check Licensing and Regulation:Ensure the firm is properly licensed and regulated by the appropriate state or federal authorities.Confirm their compliance with all relevant lending laws and regulations.
• Ensure the firm is properly licensed and regulated by the appropriate state or federal authorities.
• Confirm their compliance with all relevant lending laws and regulations.
• Assess Financial Stability:Review the firm’s financial statements and balance sheets. This will give you insight into their financial health and stability.Look for any red flags, such as high debt levels or irregular financial practices.
• Review the firm’s financial statements and balance sheets. This will give you insight into their financial health and stability.
• Look for any red flags, such as high debt levels or irregular financial practices.
• Understand Their Underwriting Process:Inquire about their underwriting criteria and process. Ensure they have robust risk assessment protocols in place.Ask how they assess borrower creditworthiness and property value.
• Inquire about their underwriting criteria and process. Ensure they have robust risk assessment protocols in place.
• Ask how they assess borrower creditworthiness and property value.
• Examine Legal Documentation:Carefully review all legal documents, including loan agreements, investment agreements, and any other contracts you will be required to sign.Consider having a legal professional review these documents to ensure your interests are protected.
• Carefully review all legal documents, including loan agreements, investment agreements, and any other contracts you will be required to sign.
• Consider having a legal professional review these documents to ensure your interests are protected.
• Request References and Testimonials:Ask for references from other investors who have worked with the firm. Speak to them about their experiences and satisfaction with the firm.Look for testimonials or case studies that demonstrate successful investments and positive investor experiences.
• Ask for references from other investors who have worked with the firm. Speak to them about their experiences and satisfaction with the firm.
• Look for testimonials or case studies that demonstrate successful investments and positive investor experiences.
• Evaluate Transparency and Communication:Assess how transparent the firm is about their operations, fees, and processes.Ensure they provide clear and regular communication about your investments, including updates on loan performance and any issues that arise.
• Assess how transparent the firm is about their operations, fees, and processes.
• Ensure they provide clear and regular communication about your investments, including updates on loan performance and any issues that arise.
• Analyze Risk Management Practices:Understand how the firm manages risk. Ask about their strategies for mitigating potential losses and protecting investor capital.Inquire about insurance policies or other safeguards they have in place.
• Understand how the firm manages risk. Ask about their strategies for mitigating potential losses and protecting investor capital.
• Inquire about insurance policies or other safeguards they have in place.

• Look into the firm's history and reputation. Research their performance over the years and check for any complaints or legal issues.
• Verify the success rate of the loans they have funded. Request data on default rates and how they handle defaults.

• Ensure the firm is properly licensed and regulated by the appropriate state or federal authorities.
• Confirm their compliance with all relevant lending laws and regulations.

• Review the firm’s financial statements and balance sheets. This will give you insight into their financial health and stability.
• Look for any red flags, such as high debt levels or irregular financial practices.

• Inquire about their underwriting criteria and process. Ensure they have robust risk assessment protocols in place.
• Ask how they assess borrower creditworthiness and property value.

• Carefully review all legal documents, including loan agreements, investment agreements, and any other contracts you will be required to sign.
• Consider having a legal professional review these documents to ensure your interests are protected.

• Ask for references from other investors who have worked with the firm. Speak to them about their experiences and satisfaction with the firm.
• Look for testimonials or case studies that demonstrate successful investments and positive investor experiences.

• Assess how transparent the firm is about their operations, fees, and processes.
• Ensure they provide clear and regular communication about your investments, including updates on loan performance and any issues that arise.

• Understand how the firm manages risk. Ask about their strategies for mitigating potential losses and protecting investor capital.
• Inquire about insurance policies or other safeguards they have in place.

Anderson S. · Answer

Let's find some time to chat!

Robin Simon · Answer

What amount of $ are you looking to invest?  I think the other commentators have it right - a HML that is willing to take an investment that is small is probably not vettable and not a smart play - however if you have ~$500k or more to put in, then the legitimate more easily vettable firms would pottentially be interested - and you would be able to see the sophisticated setup, documents, structure etc and be able to research accordingly

Marina OLeary · Answer

Nope, I wasn't clear. I am just wanting to invest in a hard money lending fund...and wondering how to vet that fund.

How to Vet a hard money lender when investing my money

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