Private Money Lender - How to Qualify the Lender?

[Mark Eichlin]

We are seeking to use Private Money Lenders to fund our individual fix and flips (Project Funding). We don't know the Lender personally, and desire to check to see if they are legitimate before we move forward.

What "due diligence" should we perform to confirm the integrity of the Lender?

What other measures should we take to protect ourselves, our company, and our project property?

Thank you...

Mark

[Jeff S.]

This is a very astute and oft overlooked question, @Mark Eichlin . Most borrowers have little to go on and just hope and pray their lender can and will perform, and do it fairly. It doesn't have to be that way.

Checking each other out is a two way street, and often only focused on by the lender. There are many lenders that rely on paper alone (i.e. a borrower's personal documentation, property appraisal, title report, etc). Here, the borrower and lender might never meet. This is especially true for out of town lenders, which I would avoid if you can. Lending is a relationship-based business and that won't develop over the phone, email, or heaven forbid, by applying for a loan on a website. These almost never give the borrower an opportunity to get to know anything about a lender.

You can ask colleagues who have worked with them to get a sense of a lenders reputation, but this is not usually specific enough. We insist on personally meeting all borrowers, not only to get to know them, but so they are comfortable with us as well to sense each other's integrity. This generates a much closer, trusting, personal relationship and a sense of loyalty to one another (assuming, of course, that you hit it off).

Our meeting might include a visit to a few of their ongoing or potential properties and is almost always followed by lunch or dinner. Sometimes it's only just to eat. You might suggest this to your potential lender and come ready with a list of questions.

While you might have had a phone discussion to get your initial questions asked, here's a semi-random list the questions we're often asked, which I'm sure is incomplete:

Annual interest rate

Points

Fees

LTV and how it's calculated (based on ARV or purchase price or ?).

Duration of the loan

Can I make all payments at the end?

Requirements for a loan extension

As a lender, how do you comply with our state's licensing and usury requirements?

How much time to you need to fund? How fast can you fund?

Where do you get your loan docs and have they been reviewed by an attorney (hopefully a lending attorney) -- shows professionalism.

What documents will you require from me.

Specific property types you will or will not fund.

Will you fund both the purchase and rehab money? Terms?

Where do you get the money to lend? Do you sell your notes (i.e. will you be my lender throughout the entire project)?

Can I have a copy of your note for my review?

Under what terms have you ever backed out of a loan.

What haven't I asked that I should know?

Considering what a lender will ask of you, I consider none of this invasive or offensive. If a borrower doesn't ask, we'll volunteer the info. There should be no surprises at closing or even when you present a deal.

For more details, ask the lender what name they lend under (i.e. the trustee or mortgagee on their docs). Many title companies will allow you free access to their site where you can do a search for documents recorded under this name. Here you'll find who they do business with, how active they are, what their mortgage or deed of trust looks like, extensions, modifications, and any foreclosures they've initiated.

In the end, you never really know who your dealing with until you've done a few deals. Plus, once the loan is made, there's no way to know how flexible a lender is until you have a problem, and by then it can be too late. It's always trust, but verified.

Good luck, Mark.