13 Rules to Vetting Private Money Lenders!!

[Herndon Davis]

Don't let your excitement and determination to get a deal funded blind you to the notorious red flags of so called Private Money Lenders. Believe me I know, I've dealt with enough PMLs to see the red flags before they even reach out to say hello.  I've written about this before but it bears repeating, don't get taken out of desperation. Unlike traditional lending there are NO rules, regulations, laws, licenses or governing bodies to hold Private Money Lenders accountable to. Every PML literally makes up the rules as they go.

So here's our I engage Private Money Lenders and I suggest that you do similarly.

Nearly all Private Money Lenders will flatly say "hell no" to my requests below. Believe me I've tried LOL.  Once you've been burned by one you will vet the rest as if their auditioning for an entry level position at the CIA. But shockingly not all Private Money Lenders are sneaky scam artists. So if you find one whose willing to operate in truth, honesty and integrity then they will not have a problem with the following (13) Rules of Engagement I have created when dealing with PMLs.

1-I require that we transact all business using a local Title Company of my choosing, using their resources (i.e. title search etc), their loan servicing capabilities and an attorney of my choosing to draw up contracts.  So avoid anyone who has an aversion to Title Companies or who see them as impediment to getting the money in your hands quickly.  Major RED flag.  I also require my loan be serviced by the title company versus sending in money directly to the PML.  There's a 3rd party entity recording everything.  Scam artist PML don't like paper trails.

2- I will NOT send any upfront origination fees or other related loan fees prior to closing.  Easiest scam on the planet is that a PML agrees to fund your deal if you send in an origination fee.  Ooops can't fund the deal for this reason or that.  Or they just stop answering their phone.  Private Money Lenders pretend that they need to pay their staff, the underwriter, the attorney to analyze your deal first. So they need you to send in the money now.  Well to me that's just the cost of doing business and if you don't have the deep pockets to pay your staff to do this on an ongoing basis then do you really have the funds to close my deal? The answer is a big fat NO. They also may say it shows you're committed and lie they've been burned by folks backing out of deals at the last minute.  Really??? Every investor I know is jumping through hoops to get deal done.  So don't fall for their lies.

3- I will secure and pay directly for ALL due diligence documents that the PML requires to make their decision (i.e. title search, inspection reports, etc.).  PMLs will not charge me for any due diligence documents. Documents will be prepared and sent to the PML via third party hands and I will secure copies for myself.  This is done for 3 reasons.  It prevents them from overcharging you for these services especially if they order it themselves.  You get to keep copies of everything if you order it versus them. This then allows you to put together an even stronger package for the next PML or partner you meet.  Finally they could just not order anything at all and just take your money.

4- Once the PML agrees to close the deal, they MUST wire their funds to the table first BEFORE I send in my origination fee. Once we mutually receive signatures, finalize paperwork and the deal is closed, that is when the title company wires my origination fee to them  Again nothing will be sent upfront or prior to closing.  This is self explanatory.  You won't my origination fee?? You fund my deal just that simple!

#6- Don’t be too anxious or hard up to find a Private Money Lender!! These folks smell your desperation, your newness and can easily emotionally manipulate you by dangling an allusion of their wealth in front you. Don’t fall for the “I’m ultra successful” act. Anyone who brags about it too much ain’t it!

#7- Choose a Private Money Lender that’s recommended to you from someone you TRUST. Avoid Private Money Lenders who mysteriously contact you out-of-the-blue without context or explaining how they found you. You may want to network at local real estate events to find local Private Money Lenders but remember just because they’re local doesn’t mean they’re trustworthy! It may take years but don't just choose someone out of frustration.

#8-Avoid any Private Money Lender who balks at being vetted, investigated or who wants you to simply accept their word with a handshake, a smile, a reassuring phone call or a calming email. If they try to make you feel small, silly, too new to the game of real estate investing to be taken seriously, then RUN AWAY LIKE HELL!!

#9- Require that your Private Money Lender disclose their full identity, personal and company contact information that can be verified, skip traced along with proof of the nature of their business, bank and client references etc. Always check client references BUT remember the client references can be in on the con as well, so still you have to investigate further even if you get glowing references. I had the same thing happen to me and my client. It was all a con.

#10- If you happen to be a Loan or a Mortgage Broker working with a Private Money Lender funneling your clients to them, then you should require a Broker Agreement be created that contains the Private Money Lender's verifiable and skip traceable identity that clearly states your broker compensation fee once the loan is closed at ANY time. Some lenders will try and avoid paying you by denying the client at the last minute then picking them back up again at a later date.

#11- Check to see if your Private Money Lender or group of individuals are actually Accredited Investors per the federal government criteria. If not then it isn’t necessarily a major red flag but should definitely give you pause going forward.

#12– Ask around on LinkedIn. Check their website, news sites, google searches, Yelp, 411.com and any other social media platform to investigate your Private Money Lender.  Still can't find them, then count your blessings and walk away.

#13 –Require that the Private Money Lender agree to accept recent a tri-merge credit report pulled by YOU that has redacted or blacked out SSN information. This prevents all those new accounts opened in your name days or weeks later.

Always remember to Do YOUR part in vetting Private Money Lenders. Great success to you in your real estate investing endeavors!!