Private Or HML--What Could Go Wrong-And How To Qualify A Borrower

[John Thedford]

Hello all:
I posted a couple weeks back about a recent HML I completed. There were several replies that I really enjoyed and I got different points of views, etc. One poster stated something to the effect "don't mistake brains for a bull market" which certainly makes sense. Another poster stated that although I don't offer consumer loans, that the day may come I have to defend myself and lending practices in court. Dodd-Frank tightened lending standards for consumer loans but left the door open for commercial loans. DF requires a lender to qualify the borrower to determine if the borrower will have the ability to repay the loan. Commercial loans are exempt from these qualifications.

What could go wrong? In the short time I have done HML I had one borrower die and another borrower get busted by the FEDS for selling meth from the collateral property. The FEDS moved to seize the property. I was made whole in both circumstances. What IF these were tied up in the courts for months or longer? Would you or I be prepared to deal with these unforseen situations?

More importantly, another poster had stated the possibility of being sued by a borrower for not qualifying them. Commercial loans are exempt, but that is no guarantee a soured borrower won't blame the HML. The main question is: what are the important questions to ask, what documentation should a private lender ask for, and what guidelines might be suggested to prevent problems from arising from a private loan? Finding borrowers is easy..finding ones that will handle the loan in a professional manner is a different story. I just had one guy pay me off that was a TOTAL PITA for months! 

Paging @Jay Hinrichs and other experienced lenders. Thanks in advance.

[Jay Hinrichs]

@John Thedford  I could write a book on this subject

however as it relates to the scale a single investor lending their own money is doing this at.

It really is state specific.. there are 18 states that require licensure.. so for the other states were you can do this without a license.

the three C's of lending are a good rule of thumb

Character of borrower  Capacity of Borrower and the Collateral.

for someone like you John who is an active RE agent checking out the collateral should be pretty simple... you have access to MLS and or know your values.

Character is a huge one in my mind if your dealing with people you don't know I would suggest you vette them just like your tenants.. IE criminal and credit checks....

Credit is a credit check on the person.. to not do this I think is a mistake... people talk great game then you find out they have a pattern of not paying bills ... stiffing ex wife and child support etc.

you make the call on credit what's important to you.

that's basically it and of course buy title insurance with lender endorsement ALT A policy.

Keep tabs on hazard insurance ( even will insure them myself and just charge them at payoff) and of course if your going over a year check on property tax's.

If your doing rehab loans.. consider a hired inspector for 100 bucks an inspection and charge borrower.

NO second or junior position lending ever .. just not worth the brain drain..  No allowing borrower to put second position loans behind you... this creates issues if you have to call the note.. you cant take a deed in Lui if you have a second and they won't release so it forces you to the full foreclosure process.

LTVs are personal choice.. if I like my guy or gal and have tons of experience I can do 100% no problem but I get paid handsomely for being their money partner not just HML rates.

but for this post as low as LTV as will make the deal work is what you want.

You want borrower to have some skin in the game ( unless as stated you have a multi year track record with our borrower).. the more the better

Points and rates.. IN most states unless your licensed your not legally allowed to take points.. in lui of that you can raise your rate...

most folks going to private lenders as we are discussing are looking for cheaper money than the local HML ing shop... but its negotiations at that point.

Land loans are to be avoided unless again you want to own that land... these are the most risky .. and most lenders will not go over 50% LTV I would not do that and I would want significant cash into the deal... Land depending on where it is can take years to resell if you take it back.

Single purpose commercial one should be careful on...

but the bulk of the opportunities are going to be rehab funding.

New construction is an option but comes with its own set of risks... again significant actual cash into the deal.. and top quality draw inspector.. who can check that things have been signed off etc.. you also want to put in controls for lien releases etc.  Nothing worse than a half built home foreclosure.. Very few if any lenders will step in half way....

so there are a few tidbits.