Questions for Hard Money Lenders

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I have an investor client who wants to diversify his real estate portfolio by making some hard money loans through a local hard money lender here in Texas. What are some good questions for someone looking to invest with a hard money lender to ask? He fully understands how hard money loans work and how the hard money broker will take a cut for sourcing deals, handling due diligence, originating the loan, and servicing it. So, I'm primarily looking for questions a first-time hard money investor might not think to ask. Thanks!

@David Ivy To me, the most important questions are going to be in regards to how well they vet their clients/properties. Ask them for their due diligence checklist - like do they require appraisals, credit check, tax returns, etc. It varies lender to lender, so he could get a better estimation of the risk based on that to narrow down lenders, and then dig in from there. 

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There have been many threads on vetting lenders from a borrowers viewpoint, @David Ivy, and these include many sample questions that might be helpful to you as a potential lender with an HML. Here are a few of them:

Private Money Lender - How to Qualify the Lender?

How to Vet a Private Lender

If I wanted to invest with a local hard money lender, I would first decide my desired involvement, risk tolerance, and diversification profile. That is, do I want to buy the notes whole, participate in a fractionalized note (if legal in your state), or invest in a mortgage pool? Also, in-state only or out-of-state. The challenge then would be to find corresponding lenders I'm comfortable with.

There is no substitute for checking someone out eye-to-eye.  With any amount of real money to invest, I would take a potential lender to lunch. In no real order, here's a semi-random list of questions I would ask:

  • As a lender, how do you comply with our state's licensing and usury requirements?
  • What requirements must I meet to invest with you? (Both your requirements and any state requirements). Plus, any accredited/sophisticated investor rqmts., etc.
  • Where do you get your loan docs (and PPM if appropriate) and have they been reviewed by a lending and/or securities attorney? Who?
  • How do you price your loans to me? At a discount? At par and you simply keep the points and fees? Some other way?
  • Will the sale to me be through an escrow company?
  • Will I fund the loan directly or buy them through you using an assignment & allonge?
  • Will they be seasoned? For how long?
  • Will I be covered by a lenders title policy?
  • For whole and fractionalized notes, how will you help me/us if a loan goes bad?
  • Who will service these?
  • How does your mortgage pool comply with all State and SEC requirements and how is it organized? (If applicable, of course.)
  • Types of loans you specialize in (SFR, MFR, retail, office, industrial, mobile homes, self storage, etc.). What do you avoid?
  • What are your typical terms for each of these asset classes? (Interest rate, Points, Loan duration, LTV, etc., etc., etc.)
  • How many loans have you done and for how long?
  • What is your default rate?
  • Can/do you make consumer purpose loans? (Typically longer term and require an NMLS registration.)
  • Will you loan in first and second position? Purchase and rehab loans?
  • Typical size of your loans and what is your minimum investment?
  • Please provide recommendations from some of your investors? (Never accept that these are private. Mortgages & DOT's are matters of public record.)
  • Can I have a copy of your note, mortgage, and disclosures for my or my attorney's review?
  • What insurance do you require of your borrowers?
  • What haven't I asked that I should know?
  • Oops, almost forgot. How do you vet your borrowers and their properties?  Will I have an opportunity to meet and vet these on my own?

Good questions above, will elaborate with:

1. Do you provide returns which can increase based on frequency of lending/amounts loaned?

2. Can I put monies into a fund OR choose the loans to participate individually (and how much)?

3. The primary focus is protecting principal and if trouble seems imminent (ie: foreclosure) what options do I have to preserve the investment? 

4. How transparent are you?  Do you have lender meetings to provide full disclosure of the past quarter and future projections versus goals, etc.

5. Wire deposits or checks?  IRAs ok? Who is the intermediary?

@Steve Babiak pretty well covered above and the reason when I did my second HML venture I only used bank LOC's and no private investors... lots of work keeping everyone happy and answering all these type of questions.

However for brokers who work in this manner IE with the individual or pooled investors going through this initial pain of attracting investors, once you have them and you and the loans you source perform you can build a client base that will last for literally decades..

@David Ivy

Here are a few to ask when looking for a Hard Money Lender

- What % of the ARV is lent out (Ex: 70% ARV for rehab, 65% for new construction)

- What is the interest rate?

- What are ALL the fees? This includes things like origination points, fixed fees, draw fees (from repair escrow), required 3rd party fees that other hard money lenders would not require (e.g. certified appraisal, legal fees).

- When are the points & fees paid? (e.g. at closing or when you refinance / sell the house?)

- How fast can the deal close?

- Is there a minimum loan term? If so, what is the pre-payment penalty?

- Is there a maximum loan term? If so, what happens if more time is needed?

- What is your draw process and how quickly will I receive funds?

- When are interest payments due? Are property tax escrow payments or anything else paid along with it?

- What properties do you not lend on?

- What other value-added services do you provide that other hard money lenders do not?