What to look out for when dealing with private lenders

[Shelby Barker]

Hey! For anyone looking at private hard money loans be very careful! Here are some things to consider.

1. Also search for reviews or get references. 

2. Don't wire "upfront/deposit money to a lender EVER.....seriously don't

3.If it feels weird....something probably isn't right.  

4.If it sounds too good to be true, it probably is. 

Unfortunately, I learned this the hard way. 

[Ryan Blake]

@Shelby Barker Great advice and I am sorry you ran into that! I try to scream that from the rooftops but there is no way to be loud enough for everyone to hear. Application fees (over $100) or any form of commitment fee are very suspect on smaller deals meaning under $1million. There are legitimate companies that will charge these but there are far more unscrupulous companies that do the same. That is why most lenders completely went away from these about 5 to 10 years ago.

Other questions to ask your prospect HML are:

Are you a direct lender?

This will be a gateway question. If the answer is no, that means they are a broker of some type. Typically this means they will take longer to close, may not have all the information of the companies they work with, and most hard money brokers get their money by taking an existing product and adding extra points to pay their fee. The person you are speaking to should have an email address with the name of the company and work directly for that company. Otherwise you could be getting yourself in to a bad situation.

What is your investor success rate?

This is important to know but can be lied about very easily. Many don’t track this statistic. I don’t know if it is because they don’t really care or just haven’t thought of it or it is so bad they don’t want to share it. I think it is probably the most important stat. Look for groups who offer referrals to local contractors, Relators, etc. Also, look for groups that have boots on the ground in each market that know the specifics of investing in that area.

How many loans have you closed in this month?

Any good HML will know this number off the top of their head. You want a lender that is busy and closing loan in your area. Who cares if they closed 100 loans in other states, find out what they are doing in the same area you plan to be. If they are closing a lot of loans, they probably have something good to offer. A good number will vary based on the current market and the size of your metro area.

Can you share a recent closing document or HUD?

This will show you more evidence of the fees they really charge. Not all lenders will share this as they will need to get approval from the borrower before providing. If not, at least make sure that you get a term sheet. This should put in writing what the fees will be.

What is your maximum LTC and LTV?

LTC is sometimes referred to initial funding. This is the percentage of costs (purchase and rehab) covered by the loan. A general range tends to be 85% to 100% covered.

LTV is normally expressed as a percentage and that percentage is of the ARV. A general range tends to be 65% to 75% of value.

Lenders will lend the lower of the amount between LTC and LTV.

Do you require an appraisal and survey?

Most HMLs will require these. I am wary of the ones that don’t require an appraisal. Lenders that don’t require an appraisal will perform a desktop appraisal but will typically have a very conservative view on the value of the property to protect the company’s investment. This means you will be coming out of pocket more. Small-time HMLs may not require an appraisal but this could be because they will drive out and view the property themselves. Survey is a toss-up on whether or not it will be required. Know that every long term lender will require a survey and if something comes up on it when you are trying to sell or refi, you could get stuck in hard money without an easy or quick way to get out.

Is there a pre-payment penalty?

Some will require you to pay the interest through the term or another length no matter how long you hold the loan. Just make sure that you include this requirement in your costs.

Do you have relationships with refinance lenders?

Make sure that they have a good relationship with companies that will refinance the loan for you if you are using a BRRRR method. You want to see something that has low or no seasoning for a cash out refi or that may require low amount of documents.

What is your draw fee & benchmarks for the repairs portion of the borrowed money?

Know what your fees will be to take out the repair money borrowed. Draws are almost always held back until you reach certain points in the project or that work is completed. They will also charge you to have an inspection by a 3rd party to make sure the work is done. I have seen this range from as low as $100 up to $300.

Do I need to pay anything before sitting at the closing table?

There have been numerous people on BP talking about how they paid application fees but they could never get their loans closed on any deal brought to the company. This is a practice by some less than reputable companies. One I saw charged $500 upfront to be pre-approved and would never actually fund any loans. Just beware. Most reputable HMLs will not charge anything until you are sitting at the closing table and all fees will be listed on the HUD-1 closing document.

And of course, what are the points, interest, and attorney/document/admin fees for the loan?

This will vary based on region but in general 2 – 5 points, 9% - 14% APR (meaning this is the annual rate so divide it by 12 to get the monthly interest amount), and documents fees can be from $600 – $1,900. The document fees are what will vary wildly from company to company. Just know them going in so that you can properly budget. You will also want to find out if payments are interest only or if some principal is built in. Most hard money will be interest only payments on the full approved balance of the loan whether or not if you have pull the draw funds for repairs.