What are potential issues with private money lenders?
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Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Originally posted by @Billy Bob:
Thanks Dave. Yes, I figured I needed a solid paper trail of payments. I plan on having a RE Attorney either draft or review the Lender's agreement prior to signing. That's what I thought, if a PML does not release the Deed after pay off I would need an attorney to get that done. They're charging 3 points on the loan. The Lender wants to use his title company. Any issues with that?
Then, you're not dealing with "private money" you're dealing with someone who is actually doing business as a lender.
First, find out if this lender is a registered and licensed to do business, you can ask for his documents and get the name the money is loaned in. Then check out that name, Secretary of State and State Finance Department, if he isn't registered and he was soliciting loans, he's most likely in violation.
Next issue, all ready, is that he requires you to use his title company, he can require the note be closed at his settlement agent, he can't require you to use title insurance from his favorite company. You may have misunderstood that.
Points are prepaid interest on any type of loan, commercial or residential. I have not seen any state that allows a non-registered or unlicensed lender to charge points, so you have another violation most likely.
As a borrower, if it's really an individual lender you need to use a loan servicing company, that's the best way to ensure you don't have problems.
You could be working with a shamster lender, lots of them out there who lend and even set up a default (just toss your payment in the trash, it could be 30 days before you even realize payment wasn't made!) as they plan on taking the property. Indicators for such lenders are those who have no license and who don't register, charge points and run afoul of lending regulations.....not saying that's your case, just indicators.
Private money is from an individual who is not in the lending business, investors try to use the term but incorrectly. Lenders use the term to soften the "hard money lender" stigma and to market themselves as being easier money to obtain or other benefits as if it's a private transaction, sort of no lending rules like the bank has.
There are many issues using private money, much depends on who approaches the matter, who makes the offer. You should do some reading here in this forum concerning private lending and HMLs.
I think one of the biggest mistakes investors make is not understanding financing much better than they do, many think they do, but they really don't. Lenders have been around forever, I've not seen too many lenders using their money who are in their 20s or 30s, most are much older and have been in the business for years. Many take a rather arrogant attitude, as if they know what they are doing and will continue to do things as they have 10 or 20 years ago.
If a borrower is better educated in financing, you can have a much better feeling knowing that if some guy tries pulling anything you can clean their clock. With some violations the lender can lose the entire amount owing plus damages and get hit with fines. If someone tries to screw me over intentionally my goal is to destroy them, totally. IMO, borrowers lack education playing this game which is why some get messed over by individuals. Things have changed, if they fail to change they can be easy pickings. Don't bet that a RE attorney will be up to snuff on lending issues, his attorney or yours or that they can guard against issues down the road. :)
7 Replies
- Investor · Rochester, NY · Member since 2012 · 316 posts · 102 votes12y
@Billy Bob I think the biggest thing to minimize your concerns is to track each of the payments you made either with cancelled checks or copies of your checks from your online banking site. Then when you go to get the deed release if there are issues your attorney should be able to file suit if need be.
You should have an attorney draft up a mortgage agreement between the two parties to solidify this deal.
- Citrus Heights, CA · Member since 2013 · 34 posts · 3 votes12y
Thanks Dave. Yes, I figured I needed a solid paper trail of payments. I plan on having a RE Attorney either draft or review the Lender's agreement prior to signing. That's what I thought, if a PML does not release the Deed after pay off I would need an attorney to get that done. They're charging 3 points on the loan. The Lender wants to use his title company. Any issues with that?
- Investor · Rochester, NY · Member since 2012 · 316 posts · 102 votes12y
@Billy Bob If you are getting title insurance, if the company is reputable I wouldn't see an issue using their title company. 3pts isn't that uncommon for a Hard Money loan, but for a PML it is up to negotiating...I bet if you do more deals with them you should be able to get this dropped over time.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Originally posted by @Billy Bob:
Thanks Dave. Yes, I figured I needed a solid paper trail of payments. I plan on having a RE Attorney either draft or review the Lender's agreement prior to signing. That's what I thought, if a PML does not release the Deed after pay off I would need an attorney to get that done. They're charging 3 points on the loan. The Lender wants to use his title company. Any issues with that?Then, you're not dealing with "private money" you're dealing with someone who is actually doing business as a lender.
First, find out if this lender is a registered and licensed to do business, you can ask for his documents and get the name the money is loaned in. Then check out that name, Secretary of State and State Finance Department, if he isn't registered and he was soliciting loans, he's most likely in violation.
Next issue, all ready, is that he requires you to use his title company, he can require the note be closed at his settlement agent, he can't require you to use title insurance from his favorite company. You may have misunderstood that.
Points are prepaid interest on any type of loan, commercial or residential. I have not seen any state that allows a non-registered or unlicensed lender to charge points, so you have another violation most likely.
As a borrower, if it's really an individual lender you need to use a loan servicing company, that's the best way to ensure you don't have problems.
You could be working with a shamster lender, lots of them out there who lend and even set up a default (just toss your payment in the trash, it could be 30 days before you even realize payment wasn't made!) as they plan on taking the property. Indicators for such lenders are those who have no license and who don't register, charge points and run afoul of lending regulations.....not saying that's your case, just indicators.
Private money is from an individual who is not in the lending business, investors try to use the term but incorrectly. Lenders use the term to soften the "hard money lender" stigma and to market themselves as being easier money to obtain or other benefits as if it's a private transaction, sort of no lending rules like the bank has.
There are many issues using private money, much depends on who approaches the matter, who makes the offer. You should do some reading here in this forum concerning private lending and HMLs.
I think one of the biggest mistakes investors make is not understanding financing much better than they do, many think they do, but they really don't. Lenders have been around forever, I've not seen too many lenders using their money who are in their 20s or 30s, most are much older and have been in the business for years. Many take a rather arrogant attitude, as if they know what they are doing and will continue to do things as they have 10 or 20 years ago.
If a borrower is better educated in financing, you can have a much better feeling knowing that if some guy tries pulling anything you can clean their clock. With some violations the lender can lose the entire amount owing plus damages and get hit with fines. If someone tries to screw me over intentionally my goal is to destroy them, totally. IMO, borrowers lack education playing this game which is why some get messed over by individuals. Things have changed, if they fail to change they can be easy pickings. Don't bet that a RE attorney will be up to snuff on lending issues, his attorney or yours or that they can guard against issues down the road. :)
- Citrus Heights, CA · Member since 2013 · 34 posts · 3 votes12y
@Bill. Thank you for the frank advice!!
It is a Lender. They have a client that loans money for RE deals. I don't have all the details yet, but I'm assuming the company does the servicing. The company and the agent are both licensed by the DRE. There are no complaints. The company is a corporation with active status, no suspension or complaints with the State. They are not members of BBB and have one complaint that claims someone used their credit info to try to open credit. Who knows if that is accurate. It appears at this point that this company may be legitimate. I will take your advice on the title insurance if I proceed.
- Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes12y
I would use a 3rd party Loan servicer to process the payments. Then if there is ever a dispute about payment history there is a neutral 3rd party. For $20 a month they document everything, a small investment in the scheme of things.
- 12yClay SmithBusiness MemberInvestor · Louisville, KY · Member since 2013 · 419 posts · 244 votes
Is this lender a member of your local REIA? Ask around and get referrals. What you are listing sounds about on par for one of our local PM lenders. Nothing new there. Nothign that sounds concerning.
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