How to properly vet a lender?

[Account Closed]

Hi all, I was just wondering how you guys vet hard money/private money lenders? Hopefully this does not offend anybody here, but alot of private/hard money lenders I've come across really give off a scammy vibe! How can I make sure somebody is legit???

[Andrew Michael]

Hey @Account Closed 

Good question and any legit lender should be willing to take the time and really answer all of your questions thoroughly and thoughtfully.  After all, you and your hard money lender are in a partnership of sorts so it is in everyone's best interest the deal goes well.  

The first thing I would ask is how many current loans do they have on the books and specifically how many in the area of the subject property.  National lenders have their place but I tend to favor local lenders that have an intimate knowledge of the area, can give you solid market feed back, and understand the demographics of where you are looking to invest.  The next thing I would look for is a lender who is willing to go through their loan process with you.  If they are quick to have you sign a dotted line beware.  A lender should also be willing to underwrite your deal and see if the numbers make sense.  Think of them as a partner and a second set of eyes on your deal.  Again this is where having local market expertise can be crucial. 

From there, I would ask for a loan breakdown and/or some type of term sheet so you know exactly what your terms are and what is expected of you.  When reading the terms look for red flags such as prepayment penalties, balloon payments past a certain number of months, high draw fee's, high inspection fee's, junk closing costs etc.  In most cases the following are pretty standard fee's; Points, appraisal, attorney, pulling credit.  There may also be draw fee's, inspection fee's, or wire fee's but these should be small if they are charged at all.  From start to finish the only fee's I am charged with my lender is points, appraisal (sometimes free), and an attorney fee.       

Last and most importantly, beware of high nonrefundable EMD's and high LTV lending ratios especially if you are a new borrower. Sorry but if this is your first flip and your are getting a 90% LTV ratio and generous terms something is probably wrong. No you did not get lucky, you are most likely walking into a predatory lending situation.

Call them and chat with them about potential deals and see how you feel.  Based on your post it sounds like you have a instinct for sniffing out bad lenders.  Follow your gut and find a lender you are comfortable working with.  Maybe even arrange to meet them in their office and see if the office setting is consistent with the vibe on the phone.        

Hope this helps!