How to Vet a Private Lender

[Johanna R.]

Hi All,

I've been shopping around for portfolio loans to refinance some of my rental properties.

I was contacted by another BP member who has has private lenders who said he and his partners can help me refinance - his rates are a bit better than what Ive been finding.

It's easy enough on his end to look see my credentials via credit checks - how do you vet a lender to know if they're legitimate?

Thanks!

[Jeff S.]

"The lender takes on the majority of the risk when they lend their funds and borrowers are too eager to blame the lender when their deal doesn't turn out as they planned."

On the other hand, @Johanna R., a great many lenders can't/won't perform. We get a substantial amount of business from last minute borrowers whose lender flaked out. The name of the game in this arena is to keep your money at work and unfortunately, one strategy is to promise the world and then pick and chose who you want to close with as your money becomes available. We see this with even some of the larger HML's in our area and it does nothing more than give the business an awful reputation.

The first question all potential borrowers ask is what are a lender charges (interest, points, etc.). Understandably, they focus on cost. After being screwed a time or two, experienced borrowers ultimately want to know is how fast the lender can close, are they reliable, reputable, and honest. Realistically (and unfortunately), the only way to find these out is to work with the lender and then often it's too late.

Unless your loan is from your Aunt Agnes, most lenders in an area will be reasonably cost competitive. Assuming your deals are viable, a point or percent one way or another shouldn't matter.

Most, but not all states require a lender to be licensed. You should be able to go to your state's licensing board to check credentials if that's all you are asking. On the other hand, the title here asks how to vet a private lender. Here's a list of questions, copied from this thread, that might be useful:

• 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?

"As a private lender, I am much more interested in vetting a borrower than you should be in vetting a lender."

Nonsense. This is your business to protect, Johanna. Never let anyone tell you that they have more to lose than you.