Risk associated with going with a Private Lender?

Question

I'm getting ready to do my first fix and flip and am currently seeking funding from Private lenders. I'm familiar with corporations and LLCs that pool the funds of several lenders and loan them out for a certain percentage and/or lender points. I'm highly considering going with this option. However, I've recently come across some private lenders willing to lend their own funds directly on their own, some with significantly lower interest rates. They have their own contracts, terms and conditions, etc.

If anyone could share their experience with these "solo" private lenders would be, that be great. I'm just not too sure how reliable/safe these lenders would be, especially with this being my first time seeking financing. Also, if there are any things I should look out for/pay close attention to when going over the terms and conditions, that would be very helpful.

Thanks!

Kyle J. · Answer

@Akshay Vig If you don't know the private lender well or at all, then one risk you should watch out for is that the person isn't even a real private lender and they try to collect some large up front fee and then you never hear from them again.  This is especially true if the lender initiates contact with you via email/online and is offering a too-good-to-be-true interest rate and asks you to wire them money for an application fee, origination fee, or some other fee.

There are quite a few posts from other users here on BP about situations like that.  Here are a couple recent ones:

https://www.biggerpockets.com/forums/12/topics/587565-anyone-knows-james-mourine-or-mourine-james

https://www.biggerpockets.com/forums/49/topics/595905-lender-scam-warning-north-carolina

On the other hand, if you do know the private lender well (friend/family member) then they're likely well-intentioned.  However, they could still end up getting cold feet before funding the deal and end up backing out at the last minute.  So the risk to you in that situation is that you could have already spent some money for inspections, earnest money or whatever, and then you end up losing your financing right before closing and potentially any money you've already spent.

Here's a recent post from a user who had that happen to them:

https://www.biggerpockets.com/forums/49/topics/595838-lender-backing-out-at-the-last-minute

But if you know the person well, and there's no issues with them funding the deal, then it really just comes down to the terms/conditions of the loan.  Since you're new and they're the ones providing all the documents, it wouldn't be a bad idea to have everything reviewed by your attorney to make sure you understand everything you're signing and the terms of the deal work for you.

Lastly, here's some general tips to help you avoid scams with lenders online:

Tips for Avoiding a Scam on BiggerPockets

Kathie Riedel · Answer

As a "solo" lender (I like that term) I would say your biggest concern would be that the lender might not have the funds when you need them. My clients let me know when they have a deal. If I have the money I'll tell them and hold it for them. If I don't I'll let them know so they can move on. Always give the lender a heads up.

Matt Shields · Answer

Hard money costs have come down a lot, but this being your first flip they will probably still be relatively expensive. I have funded all of my flips with hard money and have a good relationship with my lenders. As I have done more deals and built trust with my private money people the rates are now much cheaper. I have one main guy but also backups in case he would ever crap out. I would ask other investors for reliable lending sources. As always, seek professional advice. Good luck!

Bob Floss II · Answer

@Akshay Vig Talk to the lender about terms up front. I've seen some investors get too excited about private money and the day before closing find out the private investor is bleeding all the profits out of the deal. Private lending isn't cheap but I've had a few quotes that made me choke on my water.

Bjorn Ahlblad · Answer

Proceed with some caution, who knows what is buried in the docs and contracts whether inadvertently or deliberately. Perhaps a good opportunity for a lawyer to review?

Akshay Vig · Answer

Thanks everyone for the insight! Greatly appreciated. Obviously I'd like to get the best rate and have a higher profit margin. At the end of the day though, I'd rather pay a bit more and have the peace of mind of knowing that I'm not being scammed.

Risk associated with going with a Private Lender?

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