About to fund my first (recent) hard money deal, need advice
Lender · Huntington Beach, CA · Member since 2017 · 8 posts · 1 vote
Hello - I am working on getting back into real estate/investing, and I have a 6 figure short term hard money loan I want to fund for a developer who needs extra capital for some unforeseen problems with prepping the dirt for development. Lot has been subdivided for 20+ units new construction SFR, grading done. Just waiting on utilities, then vertical construction can start. I have met the principal, seen some of his other projects, walked the actual lot, etc. My first concern is protecting myself from fraud, which I have dealt with in the past.
Everything seems good, but I just want to cover all of my bases and protect myself, as I have been screwed (badly) in the past, after getting too comfortable funding deals.
Is it normal to ask for a 3rd party escrow/title report/title insurance for a private hard money deal? I just want to make sure I am in the right lien position with no surprises, and that I am getting concurrent recording/funding without worry.
For those of you that lend, what are the typical questions and details you cover and obtain as part of your due diligence, in both for fraud prevention, and for analyzing the deal?
All advice appreciated.
I would like to hear how you were “burned (badly) in the past,” @Chris Kreidel, and what your lessons learned were. I’ll note too that, “a developer who needs extra capital for some unforeseen problems ,” is code for a someone who needs a rescue loan. Watch out. This person is already in trouble, and hasn't even started building. Considering there are many safe construction loans out there, do you really want to get involved with this? Either way, here are some thoughts.
First, you ought to have a licensed California real estate broker originate this loan for you. Really, this should be a hard money lender. Hard money lenders are used to private loans like this and will help you evaluate the borrower, the property, and you as well, to make sure this loan is suitable (Not a solicitation. We don't do that, but many others do). An experienced HML will also have a vetted loan package, with all the required documents and disclosures and the experience to work with escrow and title to originate this loan. Costs will be nominal, which your borrower will pay.
Of course, you should ask for and read the preliminary title report and request lenders title insurance. Lien position and all insurance requirements should be specified in your lender instructions to escrow. Fire and hazard insurance would further be specified in your deed of trust.
I assume that since the entitlements have begun, there is a loan already in place(?). That is, you will be in second position. I hope you understand the risks associated with being a subordinate lender and that you could easily be wiped out. Construction loans are particularly risky, as you’re now getting a hint. You must confirm that the first position lender will allow a loan subordinate to theirs. Some will, some won’t.
Last, unless you have this background, you’ll need a company to monitor the construction and release your money according to an agreed upon disbursement schedule.
Good luck, Chris
I was doing hard money loans in the past (2004-2007) and did pretty well, until one guy who double closed on me. Was in 3rd position not second. Then he ended up going to jail for insurance fraud with his business. Also got burned 6 figures on another non-real estate related deal.
I am also working on the construction loan ( a better deal than what he has on the table) so I will be able to essentially ensure I get paid back. This is not finalized but in process.
Yes there is a current loan. The current problem really wasn’t a fault of his, just a consequence of the soil. I do also question why he cannot get an increase in existing loan. If you can recommend a lender to help facilitate, would greatly appreciate it. What would they charge typically for this service ?