Due Diligence on Private Lenders

[Haven M.]

I have had a couple of discussions with a private lender and have a couple of questions to put to the group.

The basics:

The lender provides funds to cover the down payment and reserves for minor repairs on 2-4 unit properties. The borrower, me, must be eligible for an FHA loan and can manage the project/investment as I see fit. The lender only stepping in if there is a concern about unethical activity. He likened it to me being the CEO of the project and he (and his partners) represent the board, and I can be overruled if they see fit.

As a next step he has asked for three years of tax returns, and my credit score. He has advised that I can redact my returns as I see fit. 

I am not in the habit of giving out my tax return info, so what should I omit in order to ensure that my information is not used inappropriately. He is looking for proof of income to determine the amount of lending I would be eligible for.

What steps should I take in terms of due diligence to ensure that the offer is legitimate?

[Jeff S.]

Originally posted by @Haven M.:

The lender provides funds to cover the down payment and reserves for minor repairs on 2-4 unit properties. The borrower, me, must be eligible for an FHA loan and can manage the project/investment as I see fit. The lender only stepping in if there is a concern about unethical activity. He likened it to me being the CEO of the project and he (and his partners) represent the board, and I can be overruled if they see fit.

A legitimate lender will want you to sign a note and mortgage or deed of trust, depending upon the state. I've never heard of anyone providing down payment money because there is nothing to secure this loan until you close. Once you close, you will own the property 100%. As 100% owner, you are not like the CEO and cannot be overruled. A lender can only influence. It's your house.

I don't know where some on this board are finding their private lenders, but the only semi-safe way is face-to-face. Personally I like real estate clubs, since they provide a neutral venue and tend to attract those that are serious in the business. Of course there are no guarantees.

"I was hoping to get specific ideas for how to do due diligence on a private lender."

There have been many threads on how to vet a lender so you might do a search. Here are my recommendations, copied from this thread:

1.Lending is a business based on relationships, not online anonymity. Find your lenders face-to-face, locally at real estate clubs or through referrals, and get to know each other. Go to their office if they have one. This is not to say that all out-of-state or on-line lenders are disreputable, they're not, but most here don't know how to tell the difference. You certainly won't get the best deal or gain the trust of someone whom you've never met. This is especially true if you need a loan extension or other accommodation sometime in the future.

2.Make sure your potential lender is licensed in your state and/or has a broker-of-record who is. Obviously state dependent, but you should understand what it takes to lend legally in your state and ensure your lender strictly complies. It should take no more than 30 seconds to look a license up online. Call this person to confirm his or her relationship with your lender.

3.Ask the name your potential lender loans under and look up a few deeds-of-trust or mortgages to confirm. If you don't know how to do this, any title company who wants your business will help you. Read these documents.

4.Ask for references and don't accept any excuse that they are private. As noted just above, mortgages and deeds-of-trust are matters of public record. It's easy to look up borrowers. At worst, their name and contact address will be on these documents.

5.Never send any personal information until you know with whom you are dealing. Ask how they will protect this info.

6.Never pay up-front fees (except maybe directly to an appraiser) and always fund thru a title company you've also confirmed really exists. No excuses.

And no, not all lenders are going to ask for tax returns. Some do, some don't. This is not required.

Here's another thread which might address your concern: Private Money Lender – How to Qualify the Lender

Good luck, Haven.