Is there anything to be aware of with hard money lenders?

Question

Hi everyone,

I get business cards from hard money lenders at meetups all the time, is there anything I should be aware of with these people or anything “sketchy” that they can do if you work with the wrong ones?

Thank you,

Kyle

Coral Hernandez · Answer

Hey Kyle,

I would say that you must do your homework, research, and read reviews.

Just like anything in life, there are ones that do it good and that maybe don't. If it sounds to good to be, it probably is. Anyone offering rates that are significantly low than everything you see around, I'd watch out. Definitely ask any HML you work with to speak with a current client.

In the end, you want to make sure the property your buying is a good deal. A lot of people have crappy deals that they want to flip wheres theres not a lot of profit, most lenders wont touch it, but then you finally find one that does. Be weary of that

Anthony Palmiotto · Answer

These are great questions. I find that many times new investors get very caught up on interest rate and points but there is a lot more to it that that. My more experienced borrowers ask very different questions...often relating to the process, the timeline, the reputation of the company. Of course, rates and terms are important but they are not the only thing. Above all make sure you work with a lender that is reputable and has a clear and transparent process.

Ann Bellamy · Answer

Kyle, while you are at those meetings, ask other people if they have done business with the person.  @Jeff S. has given you good advice, and I also have a handout of questions to ask a hard money lender that I give when I speak on the topic in MA and NH.  If you PM me I'll send it to you.  Most of the comments are about fees, but the following are a few additional important points:

• The reputation of the lender is super important.  Ask around.
• Back end fees:  Specifically ask to find out if additional fees or percentages apply at the end of the loan
• Excessive attorney costs:  Many lenders, myself included, require that their attorney handle the title work and closing.  That's fine when the costs are reasonable, but I'm aware of a couple whose attorneys charge 3000-5000 for a hard money closing.  So the rates are low but the fees are high.  Ask about this.
• There is a difference when you are speaking to a direct lender, and a broker or loan originator.  I know a few local brokers who take months to deliver a term sheet.  You don't even realize they aren't the lender until you are weeks or months into waiting. 
• I also know lenders who change the terms at the closing table.  What you were told, and what is in the loan docs, are two different things, and you don't find out until the closing when you are pretty much stuck.
• So pretty much all of these come back to #1, reputation.  It's super important.

Kyle Altenau · Answer

I'd also ask the host of the meet up group or other members at that meet up if they've worked with the lender before. If not, they can provide you with some lenders they've worked with.

One major flag I didn't see mentioned is when lenders want huge up front fees. Legitimate hard money lenders don't do that. Their may be small fees to cover things like background/credit and then maybe expense deposits further down the road to cover legal. But I've seen scammers charge people thousands of dollars up front, before even getting an app. This is as big a flag as there is.

Mitchell Chingay · Answer

I agree with the above statements. Some wisdom to apply is dont do business you cant trust probably a good indicator of future things to come. I would also say do your research on Hard Money Lenders there are pros and cons like anything else but still a good option to go with. The most common experiences people have had with Hard money lenders that they didnt like was lenders not being transparent about fees and how fast they can actually close. So as long as you have someone that can lay everything out transparently you should be fine.

Odie Ayaga · Answer

As @Coral Hernandez said sure there's sketchy actors in pretty much any industry. The ways in which someone can trick or scam you in real estate are numerous so it would be difficult to comment specifically based on what you've provided, but just the fact that someone took the time to go to a meetup and give you a business card offering to provide their service in and of itself isn't sketchy. That's how many lenders get their name out there.

Jeff S. · Answer

First off, @Kyle Curtin, I’d say you’re a step ahead of most by using good judgement meeting potential lenders face-to-face at local real estate clubs.  So many of the complaints and flat out scams on this board and elsewhere are from those who insist on doing business anonymously with strangers they met on the web.  With the number of lenders competing among each other at almost every real estate club, there is no reason to do business any other way.  This is truly a business based on personal relationships.

We insist on meeting our borrowers face-to-face and will typically visit their properties and also go to lunch to get to know one another.  This not only builds trust and credibility, but is simply the easiest way to ensure everyone’s questions are answered.  You might consider this once you have an investment strategy in mind, if you don’t already.  Your profile suggests you’re new to this.

Some private/hard money lenders will do business with those new to real estate and some will not.  If you’re new, you probably don’t even know what to ask.  There have been many posts on this.  Read here if you need a reasonably thorough list of questions to ask a private/hard money lender.  This will give you a sense of their integrity and some specifics about their processes.

Adding, to answer your specific question, the most common scam you read about are lenders who charge up-front fees and then disappear.  This is much less likely to occur when you meet your lenders at a real estate club.  A good rule of thumb is to never pay these and avoid any lender who charges them (except for perhaps large commercial loans).  All funds should transfer through title or your closing attorney, as appropriate, at closing.

Odie Ayaga · Answer

@Kyle Curtin to be fair I found my first lender right here randomly online so it can work, but looking back I'd go through referrals.

Kyle Curtin · Answer

@Anthony Palmiotto

Thank you so much!

Kyle Curtin · Answer

@Kyle Curtin

* Ann, I apologize my autocorrect goofed me!

Is there anything to be aware of with hard money lenders?

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