Vetting a Hard Money lender...

[Rocky Griffin]

How do I go about vetting a local hard money lender? I want to be fair and pay the lender for their services, however I want to ensure my assets are protected. 

[Jeff S.]

"Why the worry? Seems to me, THEY are the ones taking the risk, not you! How are your assets under threat, if you're paying their usury? But sure, have their bona fides checked out by all means. (Others might respond as to how?)..."

"They are more worried about YOU paying them back and the safety of the deal. It is THEIR money at risk."

I'm sorry, but these are truly nonsensical. As a borrower, @Rocky Griffin , it's not just your assets at risk.  You should be legitimately concerned about who you do deal with. It's your business you're protecting. Never let anyone suggest only the lender takes the risk.

The name of the game in lending is to keep your money at work 24/7. Lenders back out of deals all the time and/or change their terms at the last minute. Many lenders, even large HML's, will promise the world and then pick and chose who they will loan to when another loan pays off. You risk losing your deal, your security deposit, and even your reputation when a lender flakes out. Worse, you have no idea what a lender will do with your personal financial information once he or she has it. The risk of identity theft or credit damage is real. Do I have to mention up front fees? Fake escrow and title companies? Wire fraud? Predatory lending? There is no reason to accept these risks.

Lending is a business based on relationships, not online anonymity. Find your lenders face-to-face, locally at real estate clubs or through referrals, and get to know each other. Go to their office if they have one. This is not to say that all out-of-state lenders are disreputable, they're not, but it's difficult to tell the difference. You certainly won't get the best deal or gain the trust of someone whom you've never met. This is especially true if you need a loan extension or other accommodation sometime in the future.

Make sure your potential lender is licensed in your state, as appropriate, and/or has a broker-of-record who is. It's obviously state dependent, but you should understand what it takes to lend legally in your state. Only deal with lenders who strictly comply. It should take no more than 30 seconds to look a license up online.

Ask the name your potential lender loans under and look up a few deeds-of-trust or mortgages to confirm. If you don't know how to do this, any title company who wants your business will help you.

Ask for references and don't accept any excuse that they are private. Mortgages and deeds-of-trust are matters of public record. It's easy to look up borrowers. Their contact address will/should always be on these documents.

Never send any personal information until you know with whom you are dealing. Ask how they will protect this info. Strangely, there are very few requirements for protecting a borrower's personal info.

Never pay up-front fees (except maybe directly to an appraiser or for a credit report) and always fund thru a title company you've also confirmed really exists. No excuses.

While you might have had a phone discussion to get your initial questions asked, here's a semi-random list of topics we're often asked to discuss, 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 do 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)
• 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?
• 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.

Like all long term relationships, both you and your lender ultimately want to be comfortable with one another and mitigate each other's risk.  Yes, it's a two-way street. Hope this was actionable, Rocky.