Lending to Hard Money Lenders. How to Vet?

Question

Hey BP, I have some capital, but not much free time for active investing in real estate. I'm considering lending to Hard Money Lenders to i) put some capital to work, and ii) network with other players in my target market (flippers, GCs, attorneys, etc.) that I might work with down the line.

As someone still learning the ropes of real estate investing myself, how should I go about vetting potential Hard Money Lenders?

Thanks!

Ethan

As someone still learning the ropes of real estate investing myself, how should I go about vetting potential Hard Money Lenders?

Thanks!

Ethan

Jay Hinrichs · Answer

@Jo-Ann Lapin

this is how you Vette them

https://www.biggerpockets.com/forums/517/topics/364785-funding-commercial-and-residential-loans-in-California

Not the proper licenses instead of all the scammers out there working with no licensure

Granted not all state require license for commercial purpose loans.. Like WA does not... But Oregon CA NV AZ do.. so when you see a lender say they lend in 50 states but they have no state license in these states or NMLS you know what your up against

Jeff S. · Answer

I'm actually confused about what you are trying to do, @Ethan Anderson.  Some lenders do run their business using warehouse funding involving lines of credit, which would typically come from a bank.  Somehow, I don't think you are doing this. How is your loan to this HML secured?

Are you making a personal loan to a lender who is using one of his or her notes and deed-of-trusts as collateral?  That is, are they hypothecating their loans?

Are you investing in a mortgage pool?  Here, you are not lending to the HML.

Are you simply buying a recently originated loan from an HML?  You are not lending to the HML in this case either.  You are actually stepping into their shoes. Assuming a skilled and knowledgeable HML, this is one of the easiest ways to get into the business.  Understand, it is still involves some work on your part.   After you've done several of these, you could venture out, find your own borrowers, and have the HML do the origination for you to keep it legal.  This is what we do but we know many who only buy their loans from trusted HML's and are very happy.

There have been many posts here about vetting a lender from the point of view of the borrower, but much would still apply to you.  You might do a search, but here's a link to a few:

Private Money Lender - How to Qualify the Lender?

How to Vet a Private Lender

How to be a hardmoney lender - without the work? (Includes a broader explanation of some options for you.)

A good HML should be able to explain the process to you simply. For example, we use title and escrow in CA, not closing attorneys. In addition, you might spend an hour with a lending attorney (not the same as a real estate attorney). With the number of deals in your area, which I'm very familiar with, you'll want to keep everything as local as possible. There is no reason to invest more than an hour from your home. Good luck, Ethan.

Jeff

John Thedford · Answer

If you have extra cash why not lend it yourself as the HML? This gives you all the control AND profits. Once you have a deal to fund, take it to your attorney to write the docs and close either through them or a title company. Make sure you don't violate Dodd-Frank. I started 4 years ago and it has been pretty good. Due to DF, I only lend on investment properties held in entities. Vacant land is also safe to lend on because DF doesn't cover that. Send me a PM and lets toss over a few ideas. I am not fond of the idea of giving someone money to give to someone else:) Do it yourself, have 1st lien position, and start building your customer base. There is a lot of demand for hard money lenders.

Joshua Kaufman · Answer

@Ethan Anderson - I think I can answer some of your questions. Feel free to drop me a private message and we can go from there. Thanks!

Brent Coombs · Answer

@Ethan Anderson, so long as that puts you in FIRST position, ahead of the HML, if/when things go South, and your own research agrees with the HML assessment of each deal, that seems fine...

Ethan Anderson · Answer

Lots of good questions raised so far!

@Ruth Bayang. I am mainly familiar with RealyShares. I do consider their deals regularly, but do not get the feeling that there is as much networking upside as working with a HML in my target

@Kaz Miyazaki & @Brent Coombs & @Jeff S. The HML offers an investment proposal on the specific property, and gives their assessment of valuation (as-is and ARV). The HML also has the relationship with the flipper, and will comment on their prior working relationship. I would have a note with the HML. The lien would be transferred to me for security. The HML handles any loan servicing, including default remedies. Costs related to pre-foreclosure and foreclosure are added to the borrower’s payoff.

@John Thedford. I'll PM you. In general, I don't have any issue with the HML making their spread off my money, in exchange for finding the deals, taking a first pass at vetting, and servicing the loan. Assuming they can do all of those things at or above the level I could.

Several people mentioned getting a lending attorney involved. Couldn't agree more on that point!

Jo-Ann Lapin · Answer

You are welcome to pm me and we can speak about all your options.

Brent Coombs · Answer

I agree with Kaz: YOU need to retain control of vetting all deals the HML want to Finance.

Which is to say: do YOU have enough knowledge to effectively vet the deals?

Which is to say: would YOU make a profit on the deals if you were paying HML interest Rates?

Meantime, ask the relevant Legal people regarding your position in the mop up after foreclosures!...

Ruth Bayang · Answer

Definitely learn how to analyze deals, especially if you want to invest in flips.Have you considered crowdfunding sites like Patch of Land, Holdfolio and Groundfloor.us ?

Lending to Hard Money Lenders. How to Vet?

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