private and hard money lenders

8 Replies

How do you evaluate a hard money or private money lender?

@Lelith Walker  First thing to understand is that hard money and private money are like apples and oranges, two completely different beasts. Hard money is easier to secure, and can be found simply by searching the Internet. Private Money is a relationship driven connection with an individual willing to lend their personal funds for your real estate endeavors. These people can be found at local real estate investor clubs and meetings.

When evaluating hard money, you should focus on 4 aspects. Keep in mind the costs are much different if you decide to fix and flip, or buy and hold - so knowing this exit strategy ahead of a conversation with a lender will make life easier for both parties.

Here's what you should ask:

1) What are your rates, and how are they calculated?

- usually hard money will offer between 7-12% with lower rates offered to those with more experience, better credit, and more capital contributed to the deal.

2) What are your LTV's, (loan to value) and do you lend based % on resale value or purchase price?

- most lenders will lend between 65-75% of the resale value, and may offer a variation such as 80-90% of purchase price including or excluding rehab costs up to 100%. Each lender is different, so this is an important question to ask.

3) What are the origination costs, and other "junk" fees?

- you can expect between 1-5% as an origination fee - also known as points. Other fees may include appraisal, processing, application, etc - so it's good to know these details up front before you decide on a lender based on interest rate alone.

4) What do I need to qualify?

- lenders may require a business entity in order to secure lending, some may not. All lenders will want to verify proof of down payment, closings costs, and a variation of monthly interest reserve (3-6 months). Some may require a minimum credit requirement and even US citizenship.

This should help you with understanding hard money. Message me if you have questions regarding private money, I don't want to write another full-blown essay on this topic ;)

Terms. Rate and LTV, LTC or Loan to ARV

Turnaround (how quick to get to the money).  

Options to extend (and what it costs to do so).

What is required from you (the less the better)

Hello:

One private money lender approached me on facebook and he said the only fee he charges is a loan insurance premium cost before being funded with the loan and it's the only payment made before being funded and it can't be added or deducted from the principal amount to be loaned.  I have never met him in real life which seems to contradict the definitions presented above.   Is this a fee other lenders like these charge? 

I tried to run a background check and I was unable to find any information on this person or his business.  How does one find out if the lender is legitimate?

Originally posted by @Lelith Walker :

Hello:

One private money lender approached me on facebook and he said the only fee he charges is a loan insurance premium cost before being funded with the loan and it's the only payment made before being funded and it can't be added or deducted from the principal amount to be loaned.  I have never met him in real life which seems to contradict the definitions presented above.   Is this a fee other lenders like these charge? 

I tried to run a background check and I was unable to find any information on this person or his business.  How does one find out if the lender is legitimate?

 When you say "loan insurance"  do you mean title insurance, or are you talking about hazard insurance?  My guess is that if it is a request from the lender, he is speaking about the lender's title policy, which is title insurance for the lender.  This covers the lender in the event there were any mechanics liens or other clouds on title after your purchase.

It is not uncommon for the lender to require this.  What would give me pause in your situation is the fact that the lender isn't charging you any fees upfront.  You know he is going to get paid, so when you don't see it upfront, it's either built into your rate (by boosting your rate above market rate, the lender can get a refund), or it is a scam, and this guy is just wanting to take off with your title insurance money.  I would ask for some type of closing disclosure that discloses all of the fees.  Also, if you run it through a title company (since you have to pay for title insurance anyway) then you would have more accountability against a scammer.

Originally posted by @Lelith Walker :

Hello:

One private money lender approached me on facebook and he said the only fee he charges is a loan insurance premium cost before being funded with the loan and it's the only payment made before being funded and it can't be added or deducted from the principal amount to be loaned.  I have never met him in real life which seems to contradict the definitions presented above.   Is this a fee other lenders like these charge? 

I tried to run a background check and I was unable to find any information on this person or his business.  How does one find out if the lender is legitimate?

Scam.

Read closely, find terminology that isn't used in the industry. Never pay anything up front to morons who find you on the internet.

Cara Lonsdale

He did not specify if it was for title or hazard.  I think I am going to put him on the back burner and keep searching for funding.  I had called the OCC before posting but they do not have ways to help us verify either.   

@Lelith Walker This private lender sounds fishy. First of all, any type of fee the lender is charging up front should be paid through 3rd party escrow/attorney and will get paid to him upon closing (after he has fronted the capital he says he's willing to lend you). The fact that he is requesting this "fee" before being funded is an immediate RED FLAG.

Pay him up front and you can kiss your money goodbye.

Private lenders should understand your intention when taking on a project, and their role supplying the funds as well as receiving their interest payments. If he's a private lender, he should have:

  • 1st or 2nd position lien properly recorded on the property to secure his financial interest
  • Named loss payee on the insurance policy for the property. 

If he's a partner, you could both go on title and have it arranged to have a certain % of equitable ownership in the project. Most lenders will take monthly interest payments, or arrange to simply pay the interest due upon closing the deal at the end of the project.

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