Questions for Hard Money Lenders

[David Ivy]

I have an investor client who wants to diversify his real estate portfolio by making some hard money loans through a local hard money lender here in Texas. What are some good questions for someone looking to invest with a hard money lender to ask? He fully understands how hard money loans work and how the hard money broker will take a cut for sourcing deals, handling due diligence, originating the loan, and servicing it. So, I'm primarily looking for questions a first-time hard money investor might not think to ask. Thanks!

[Jeff S.]

There have been many threads on vetting lenders from a borrowers viewpoint, @David Ivy, and these include many sample questions that might be helpful to you as a potential lender with an HML. Here are a few of them:

Private Money Lender - How to Qualify the Lender?

How to Vet a Private Lender

If I wanted to invest with a local hard money lender, I would first decide my desired involvement, risk tolerance, and diversification profile. That is, do I want to buy the notes whole, participate in a fractionalized note (if legal in your state), or invest in a mortgage pool? Also, in-state only or out-of-state. The challenge then would be to find corresponding lenders I'm comfortable with.

There is no substitute for checking someone out eye-to-eye.  With any amount of real money to invest, I would take a potential lender to lunch. In no real order, here's a semi-random list of questions I would ask:

• As a lender, how do you comply with our state's licensing and usury requirements?
• What requirements must I meet to invest with you? (Both your requirements and any state requirements). Plus, any accredited/sophisticated investor rqmts., etc.
• Where do you get your loan docs (and PPM if appropriate) and have they been reviewed by a lending and/or securities attorney? Who?
• How do you price your loans to me? At a discount? At par and you simply keep the points and fees? Some other way?
• Will the sale to me be through an escrow company?
• Will I fund the loan directly or buy them through you using an assignment & allonge?
• Will they be seasoned? For how long?
• Will I be covered by a lenders title policy?
• For whole and fractionalized notes, how will you help me/us if a loan goes bad?
• Who will service these?
• How does your mortgage pool comply with all State and SEC requirements and how is it organized? (If applicable, of course.)
• Types of loans you specialize in (SFR, MFR, retail, office, industrial, mobile homes, self storage, etc.). What do you avoid?
• What are your typical terms for each of these asset classes? (Interest rate, Points, Loan duration, LTV, etc., etc., etc.)
• How many loans have you done and for how long?
• What is your default rate?
• Can/do you make consumer purpose loans? (Typically longer term and require an NMLS registration.)
• Will you loan in first and second position? Purchase and rehab loans?
• Typical size of your loans and what is your minimum investment?
• Please provide recommendations from some of your investors? (Never accept that these are private. Mortgages & DOT's are matters of public record.)
• Can I have a copy of your note, mortgage, and disclosures for my or my attorney's review?
• What insurance do you require of your borrowers?
• What haven't I asked that I should know?
• Oops, almost forgot. How do you vet your borrowers and their properties?  Will I have an opportunity to meet and vet these on my own?