Question for private/HM lenders: How do you verify the track record of a rehabber?

19 Replies

I would like to find out how private/HM lenders verify the track record of a rehabber.  Your help is highly appreciated!  

@Kate Lee

first make sure they are licensed and insured, then ask for references and before and after any rehabbber worth anything will have some before and after work. Heres one of my quick post I did for BP https://www.youtube.com/watch?v=Xmb1tUijOMs&feature=youtu.be also can look for rehabbers on BP or at your REIA

We dont lend hard money but we borrow a lot of it.

When we are bringing on a new lender we provide pictures and financials of past jobs, and in most cases the new lender will verify what we tell them by getting on the MLS and looking at the finished product to make sure that it was actually done, completed, and the numbers match what we told them.

Always ask for referrals from other lenders as well.

Hope that helps!

Ask for their before/after pics,  spreadsheets for each investment to review numbers,  references and list of licensed contractors they use. Their title company,  hazard insurance provider,  Realtors,  etc could provide good insight as well if you feel the need to go further.  Check cash reserves for security and tax returns if you feel the need to fully vet the person.   I've never had an issue providing all of these items to show I'm financially strong and on the up and up. 

Originally posted by @Kate Lee :

I would like to find out how private/HM lenders verify the track record of a rehabber.  Your help is highly appreciated!  

It's pretty easy to log into the title company and run a name search. You can see the all the properties bought and sold under the company name you intend to lend to. Then run the addresses through the MLS and see pics and details.

@Jeremy Tillotson  @Sam Craven  @Derek Tyler @David C.

  Thank you all very much for answering my question! :)

@David C.  Does any title company allow you to do name search?  I went on First AM title company, it seems that I have to have an account in order to do anything.  Which title company do you use?  Thanks for the info.!

This post has been removed.

Kate, you can usually go to county records and search a name, also try the property tax records by name and properties will pop up. 

In addition to what has been mention, building permits can be searched. A lot can be found in permits, the file of inspections is usually public. Do they pass the first time or are there usually issues requiring re-inspections?

I have borrowers sign authorizations to release information, past mortgage verification, tax returns, asset accounts, rents and liabilities. I may not pull all verifications, but I can as needed. 

Asking for 3 months personal bank statements and charge card accounts......I can see how you live, manage your money, I can see if you live off pizza or if you go bar hopping. I know where you get your haircut and how much you use ATMs for blow money. Your vehicles are listed on your application, I can see the gas charges, tells me how active you are and I can tell about how many miles you travel and where to. 

Your business accounts tell me who you deal with, suppliers, vendors, labor costs and who you sub work to. I also see your cash flow in the deposits, do they line up with the deals you claim to have done? If things don't look right I can use your authorization and pay the fees to obtain the last year's statements! I can also see if you are a good money manager or not. 

In a 3 month period you'll have a payment to the IRS, estimated taxes, is that in line with your claimed income?

Many HMLs don't pull credit reports, I always pulled credit. That becomes a supporting document to the matters I just mentioned, besides seeing any judgments, late pays and perhaps undisclosed accounts.

You really can't hide your experience or your financial management or your "life style" from a good underwriter or auditor, as they say.....follow the money! :)   

When I applied for a hard  money loan, I put my website in the application, which shows addresses and before and after pics for a bunch of the rehabs I have done.  I did not have to show HUDS, but @Account Closed , that is a really good idea.  I wonder if I could fine all of mine quickly. . . .

It might take me little time to round them up.

312-543-2481

@Account Closed   Thank you for all your help!  I requested the following docs from the borrower yesterday.  

1. Personal tax return and business tax return of 2014.

2. W2 or 1099 for 2014 and 2013.

3. Appraisal of the ARV if you got one from applying for the first position loan.

4. Break down of the repair cost.

5. For the closed deals, please provide lender reference, title companies or final HUDs, hazard insurance provider, realtors info. 

Originally posted by @Kate Lee :

@Account Closed   Thank you for all your help!  I requested the following docs from the borrower yesterday.  

1. Personal tax return and business tax return of 2014.

2. W2 or 1099 for 2014 and 2013.

3. Appraisal of the ARV if you got one from applying for the first position loan.

4. Break down of the repair cost.

5. For the closed deals, please provide lender reference, title companies or final HUDs, hazard insurance provider, realtors info. 

I've not encountered a HML that requests Personal and/or Business Tax returns or W2s - that's why they're going to a HML. HMLs are typically asset based - if borrowers had the requisite tax returns and W2s they likely wouldn't need a HML. I personally would avoid a HML that mirrors a Conventional bank's onerous underwriting requirements because they likely couldn't close in the needed 5-10 day period either.

David Begley, Real Estate Agent in GA (#357208)

@David Begley  Thank you very much David, for your input!  I totally agree with you, here in CA the market has been very crazy, definitely more money chasing deals, and the loan needs to close quickly.  I'm trying to find a good balance between being too strict and too lenient for lending guidelines.  I'm not using income as the main reference...just want to take a quick look at the income of the borrower, especially when I haven't done any business with this borrower, and I just started out in private lending.  I figured the more I know about the borrower, the safer it is.  The main reference I would use are the deal itself, the experience of the borrower and the asset.  

Thank you for sharing your thoughts with me!

Good thing you asked for that W2 from 2013. Now you can be certain your investment is safe.

Seriously, @Kate Lee , how does any of this assure you that the rehabber knows what he or she is doing and will repay you? Isn't that really what you want to know?

Which of these documents verifies the track record you asked of? Ok, maybe the HUD's, and there's nothing wrong with obtaining them, but they are by no means a measure of success. Are you doing dozens of these a week and maybe some that are out of state? Logistically, in this case, you'll need another strategy, but also one that can accommodate the risks I don't imagine you can afford.

Have you thought about meeting the borrower face-to-face, driving around with them and walking through or by a few of their properties? Are they full time with years of experience, or is this a hobby? Are you personally comfortable with this borrower and have a good sense of their integrity? In my view, and experience, private lending like this is about the relationship, not the paperwork.  Even the asset takes a back seat, though of course it must be qualified too.

Obviously, there is paperwork involved, but you are not a conventional lender and shouldn't be qualifying your borrower like one, in my view. Nor do I imagine you are overwhelmed with the number of loans you are doing that you have no time to get to know and trust your borrower a little, and vise versa.

Most concerning is this request:

3. Appraisal of the ARV if you got one from applying for the first position loan.

Are you saying that you've never loaned before and will be lending behind a first? I hope you understand the risks, should you borrower default on the first. There are many battle hardened private lenders, with years of experience, that won't loan in second position. I strongly recommend against this unless you are also lending in first position and even then I'd have reservations.

Also, while I don't agree with the strategy, many hard money lenders will not allow a second position loan behind their first. You might find out if yours will and obtain all of their documentation.  I've seen some weird rules. You have no idea what would cause them to foreclose. Have you talked to them as well?

Everyone has his or her favorite way to qualify a borrower and the property. When you come here you'll get many diverse answers and some strong opinions why theirs is the best. None will be any better than the next, so long as it's legal and it works for them.  Just be careful, Kate, and good luck.

Jeff

@Kate Lee

The HML I used wanted stated income and credit score verified my bank statement when I sent the application in and again 2 days before closing. They also required an appraisal and inspection to verify that my ARV and my rehab budget was correct.

Originally posted by @Kate Lee :

@David Begley  Thank you very much David, for your input!  I totally agree with you, here in CA the market has been very crazy, definitely more money chasing deals, and the loan needs to close quickly.  I'm trying to find a good balance between being too strict and too lenient for lending guidelines.  I'm not using income as the main reference...just want to take a quick look at the income of the borrower, especially when I haven't done any business with this borrower, and I just started out in private lending.  I figured the more I know about the borrower, the safer it is.  The main reference I would use are the deal itself, the experience of the borrower and the asset.  

Thank you for sharing your thoughts with me!

Kate, I would think knowing the market, the value of the house "as-is", along with avg comps for a similar house in that neighborhood would be most important. That, along with the Borrower's past experience and then lend 60% to 65% LTV and hope like hell they do default! Especially in your market.

David Begley, Real Estate Agent in GA (#357208)
Originally posted by @Derek Walvoord :

When I applied for a hard  money loan, I put my website in the application, which shows addresses and before and after pics for a bunch of the rehabs I have done.  I did not have to show HUDS, but @Account Closed , that is a really good idea.  I wonder if I could fine all of mine quickly. . . .

It might take me little time to round them up.

 They should be in your email.  Unless you only see them at the closing table. 

Jeff S Na  Thank you for such detailed analysis!  I've met the borrower a few times in the local investor's Meetups, and was told he and his partner have been in the business for some years.  That's why I requested them to show me the docs on the closed deals to check their credentials.  I was also planning to have them take me to the project site to do a walk through so I can get a good idea of the rehab cost.  The property is in a hot market of CA, not far from where I am.  But of course there are some steps I need to take before lending in second position, and it's always good to know the borrower's true qualification.  I'm in the process to establish that business relationship.  I'm aware of the risks of being in the second position and that's why a premium has to be charged to compensate for the risks.  I'm not lending to projects anywhere out of my sight.  The borrower is also open to equity sharing.  Thanks again for sharing your insight!  That's very helpful. 

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Originally posted by @Account Closed :

@David Begley on rehabs we look at 1040's for the borrower and we close in 5-7 days. Banks cant close quickly because they dont know how to lend money! Period! Do you really think that someone lending 90,95,97.5% of a deal truly understands how to make a loan? I dont think so. We look at 1040's to see if you make money. If i make a loan to someone on a rehab, on a non-cash flowing property, i need to know that you have enough income to pay me every 30 days. I know a lot of the new guys that lend in this industry and the new private guys that have all entered the mkt after the crash take payments at the end and they dont require them... when i run into those kind of lenders i ask them to name an ARV lender (besides me) that was lending pre-crash.... there are none.. ever ask yourself why? The 2006/2007 100% ARV lenders can tell you there is not always a guarantee of an end...... The wheel can't be reinvented, you can put fancy rims on it, but at the end of the day the original wheel works.

Ken, I think we're on the same page here, with the exception of our view on the value of the 1040s. The point I was trying to make was, at the end of the day, most HMLs are going to look to liquidate the asset should the deal go south in a hurry. That is why I recommended not advancing more than 55%-65% LTV. I spent 20 years of my career overseeing credit/collateral operations for "a major wholesale bank" and have been involved in the closing and aftermath (collateral liquidation) of over 500 savings and loans and banks in the southeast and liquidation of billions in mortgage collateral. I know bad bank underwriting when I see it! For a HML or private lender, should the deal go bad, a 1040 or W2 isn't going to mitigate your risk although it may have provided a little psychological balm initially. It really doesn't matter if the borrower may have external means to scrape up interest payments while the asset deteriorates. I'll bet you'd want to take control of that collateral as soon as possible in order to liquidate and recoup your investment.

David Begley, Real Estate Agent in GA (#357208)

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