how to verify private and hard money lenders

Question

Hi everyone,

I am in the process of potentially doing business with a private lender.  He owns his own incorporated real estate capital lending firm, and his terms seems very reasonable.  While his company is visible on the web, I'm overly cautious at heart and wondered if any investors here who have dealt with private/hard money lending companies or individuals have any criteria they use to verify the integrity of funds being promised. In a climate of fraudulent activity I want to know I can successfully rehab a home using a private lender and know all will go smoothly.  I do plan to use a real estate attorney to peruse all pertinent real estate documents during escrow, after I've got an accepted offer.

I appreciate any insight anyone might have!

Jeff S. · Answer

Having an “incorporated real estate capital lending firm” and being “visible on the web” means nothing, Josh.  Short of access to the Federal Funds Window, nothing a lender can say or show really proves they have the money.  There are many games an HML can play to show valid proof-of-funds when they really don’t have any.   Until recently in fact, most banks required nothing more than a lender letter indicating you have access to xxx dollars for real estate.  Even a recent bank statement doesn't prove your lender hasn't promised the money out to others as well as to you, or won't back out at the end for a seemingly trivial B.S. reason.  This is really about integrity, and it works both ways.

As you work with a lender over time, you'll both get a sense of each others reliability and hot points.  Make sure you understand and scrupulously follow their criteria.  That is, don't bring them last minute deals you know they'll be uncomfortable with and then walk away upset when they say no.  We, for example, won't loan on an occupied house or on a property we haven't personally walked through.  We also don't work with those new to the rehab business.  In return, our LTV is extremely high.  Other lenders will have different criteria and risk profiles and yet others, harder to deal with in my view, will change their terms and demands depending upon their perceived risk.  I know one large HML in LA who requires the property have a garage.  Why is this important?  I've no idea, but sometimes you won't find out until it's too late, so know who you're dealing with.

Your best bet is to talk to others.  The problem is that most rehabbers hold their most reliable lenders closely and are not likely to share resources, but you never know.  You might ask a potential lender for references.  Don't let anyone tell you they won't give out names dues to privacy.  Anyone who wants your business can make a phone call and ask for permission to give out a phone number.  Obviously, they will only give you names of satisfied customers and it might only be one or two.  These borrowers will be more likely to talk about their experiences with this lender, pro and con, and hopefully for you, some others.

In the end, if your deals are varied, you'll want a stable of reliable lenders you can pick and choose from as your properties, and their criteria, dictate.  These might range from a seemingly large “incorporated real estate capital lending firm” to truly private money from your dentist.  Good luck.

Jeff

Steve Babiak · Answer

Jeff gave a really good reply; I'll expand on one segment to give some further ideas.

Once you have identified a lender who has indicated that have already loaned locally in your area, you should ask them under what name they will record the lien.  Once you know the name being used, you can search that name in the public records in your area to identify properties where they have placed loans; from that you get the owner name and address.  Then you have somebody you can try to track down to see how things went with that lender.

Do that in addition to asking them for their references.

Ann Bellamy · Answer

@Jeff S had a good reply.

The two things to be careful of are upfront fees, and changing the terms at the closing table.  And thirdly, does the lender have the money to close.

Upfront:  There are companies that make a business out of upfront fees without closing loans.  There are even local lenders who charge hundreds to visit a property in an initial site visit.  Don't pay upfront fees.  We have only one requirement:  once we issue a loan commitment, we require a deposit to closing attorney to cover title search.  But since that is never required until you have a commitment in hand, and since it covers actual attorney-out-of-pocket costs, your risk is minimal.

Changing terms:  This speaks to integrity and reputation.  I have had borrowers report this to me when they have used other lenders.  Try the following:  First, google everyone.   Second, ask for references at your local REIA, it make take a several meetings before you get enough references of lenders to be helpful.  Third, post their names on BiggerPockets and your Social network like facebook to see if others in your network have input.  Fourth, meeting with them face to face should give you a good feeling of solid character.  Or not.

Enough money to close:  Asking for a POF is going to tell you nothing, and will probably annoy them.  If they have made too many commitments, in the context of throwing spaghetti against the wall to see what sticks, they you will have no way to know that.  In addition, payoffs from other loans may get delayed, causing them to not have enough funds when you are ready to close.  The only way you can guard against this is reputation again.

Finding lenders who consistently deliver, even if they are a little more expensive than your dentist, is priceless.  Keep at it, and you'll eventually have a few go-to people.  It will take some time, there is no magic pill to add water and get instant results.

Bart J. · Answer

As a private commercial real estate lender and someone ask us to verify we have funds to closed we give them our escrow officer info and the will verify we have funds in a escrow account to closed.and by the same token we ask the borrower to show they have the down payment.

Joel Owens · Answer

In the beginning of the process have them sign and notarize a document that no fees will be required or called for with payment until the actual closing.

I can tell you there are huge scammers in commercial real estate.From my understanding some Hedge funds are not controlled by the SEC and have been known to steal funds and take upfront diligence fees.

The number one thing I can tell you is  NO UPFRONT FEES.Ingrain that in your head.As Ibrahim says they will lead you all the way up until closing and then say there has been a delay and they need a small upfront fee.They talk to you all the time and when the money is finally given they do not answer the call and are having problems funding the loan.  There is no length these fee mills and scammers will go to for separating you from all your money.

The problem is people are such easy targets.If you call a bank many are saying "We want 35% down and have a 5 year commercial loan program"

Who the H*ll wants that??? Better off saving cash and doing little to no money down with owner finance if the loan is called in 5 years and save 30% down.

The best loans I see for commercial is 10 years fixed where they will loan 75%,you put down 10%,and the owner carries back 15%.

Cash is king right now.It's amazing the government expects a recovery with little to no financing out there.When values can't almost fall any lower they won't lend but when a bubble was happening 100% was all over the place when they should have started pulling back.The government is always backwards in their thinking.

Bart J. · Answer

Only upfront fees is the lender will ask the borrower to pay for appraisal.

Eric M. · Answer

I am a small lender and maybe I am naive but what do you think your risk is?  You mention fraudulent activity....but the vast majority of fraudulent activity is on the part of the borrower in these situations.  
It is really the lenders who need good ways to verify the integrity of borrowers cause it just takes 1 bad one to wipe out gains from 10 good ones.

As long as you never pay upfront fees, I don't really think you have anything to worry about.

Tony Waters · Answer

What about identity theft? Can a private money lender steal your identity with an ID/DL and your address and phone number?

Gordon Brewster · Answer

I agree that your best bet is to talk to other borrowers about who they recommend.  Consider working with a good local hard money broker who can present your loan request to a legitimate lenders.  Most of our business comes from referrals from mortgage brokers, bankers who send us there turn-downs, attorneys and other referrers.  It's rare that we get borrowers who haven't been referred to us.

Ibrahim Hughes · Answer

Be very careful. In my experience, there are alot of lenders who claim to fund 100% to a new investor just tend to take advantage of them. Be careful of any upfront fees (which you say don't exists) AND changes to the terms at the last minute (including an up front fee - I call these 'closing table extortions' since they happen at or near the closing table).

I would have another lender or even an equity partner (50/50 split with them putting up 100% of needed funds) on standby as a backup.

how to verify private and hard money lenders

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