So how exactly do you vet Private Money Lenders when “Private” is their First name?? Let’s be clear, I’m not talking about Hard Money Lenders who are somewhat regulated by your state or local real estate boards. Instead I’m talking about the shadowy figures who plead they are a group of private well-to-do individuals who don’t want their names, addresses and business dealings disclosed to the investors they fund or to the general public.
The individuals who hit you upon on networking sites or who find you through other means to offer their assistance. I'm talking about the smooth talking folks stalking local real estate networking events with their business cards on-ready. Unless you go on a solid recommendation from someone you trust, you really don’t know if a Private Money lender is real and trustworthy or fake and criminal. It only takes getting burned once to quickly weed out the crap.
So if you can't qualify or choose not to pursue a Non-QM (Non-Qualified Mortgage) or Conventional Mortgage then here’s what you need to do to vet Private Money Lenders before you’re taken to the cleaners.
#1- 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!
#2- 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!
#3-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!!
#4- 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.
#5- 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.
#6- 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.
#7 – 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.
#8 Require that any points the Private Money Lender charges you MUST be transacted at the closing table and NOT sent in advance of the deal. Some con artists will say they want a Good Faith deposit to show that you’re really serious about dealing with them. RED FLAG RUN AWAY!!
Instead you should send points to the Title company that YOU choose to be held in escrow until the Lender wires the loaned amount to Title to close the deal.
#9 –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.
Always remember to Do YOUR part in vetting Private Money Lenders. Great success to you in your real estate investing endeavors!!
