How to vet private lenders? They creep me out

6 Replies

We’ve made over 10 offers on sound deals meeting our criteria, only to get beat out by “cash offers” so I’m considering private $ lenders & have been contacted by a few...but I get totally on the defensive every time & it feels like working w a used car salesmen. They’re not interested in “my story “ just throwing numbers & I have a really good aw-2 job w my husband., how do I accurately vet these “lenders”?? I could still just use a bank locally, but I’m trying to avoid the 20% down scenario

private money will probably also require 20% down. As a loan originator myself, I have had the same experience as you have with some private money lenders, it does seem very car-salesmany sometimes. 

honestly speaking, if you have the ability to qualify for a conventional loan, you will get SIGNIFICANTLY better terms than going private money. I understand the frustration in getting out-bid by cash offers, and can understand where the appeal would be in going private money, so if you do go this route, I would make sure to refinance out of said private $ loan into a conventional loan as soon as possible after you've acquired the property. 

My first suggestion would be to reach out to a Broker. they'll be able to guide you to the right private money lenders for your scenario, and will spend the time to listen to what you have to say. we don't want to waste your time or ours trying to force a square peg into a round hole.

if you skip the broker and want to call around yourself, make sure to ask the right questions:

are you qualifying me off of my personal income or off the rental income of the property? what is the rate? what is the amortization? what is the max LTV? what is the term? does it balloon? and probably most importantly, is there a prepayment penalty (and how much)? what are the lender's fees/ points?

In order for them to answer these questions, they'll need to get a feel for your project, so it forces them to ask you what's going on with the property. be prepared to answer questions like:

is the property occupied with a tenant? how long is the existing lease valid for? what are the gross rents? what is market rents for property? what are the expenses of the property for the landlord (you) other than the PITIA of the property (for example, will you be paying any utility costs for the tenants)? Is there any differed maintenance? any landscaping/ gardening costs? 

it would help to have things like Profit and Loss statements and rent rolls for your subject property before calling a PM lender, so you have a solid idea of the financials. 

If i were in your shoes, I would go ahead and get a preapproval letter from a conforming lender just so you can see how much house you qualify for with them first. you'll get a feel for down, rates, amortization will more than likely be a 30-year, fixed rate, with no balloon and no prepayment penalties, and probably limited cost/ fees. Then you can compare with what you get with PM, you'll find conforming is wayyy better. at the very least, you'll have an exit strategy in-place so if you chose to go PM for the purchase, you can efficiently refi out of it as soon as possible and into a long-term, lower rate loan.

Hope this helps, sorry for the length! 

@Sasha Mohammed

your response is very helpful, we do have preapprovals /prequal letters from 2 local banks...most properties wont even let you look at them without those letters  first.  By the time we get terms/interest rates/etc. from a bank...the properties have already accepted all cash offers....so our original offer has to be "all cash" to even have a chance...which means we need a private money lender sitting on the sidelines.  we dont even get to see the rentroles until after offers are accepted on most properties...these are not commercial properties.  we are focusing on Multifamily, up to 4plex...we have 1 duplex purchased and another under contract as of today,  the original cost us over 30K upfront just to purchase (closing cost + 20% down)  after this next closing, we are basically out of capital.     i understand the "skin in the game" that lenders want you to have invested, im just confused as to the "no or low money down" purchasing of real estate so often spoken of here...the only way i see that occuring is to have someone else  (friend/family) loan you the 10-20% down, then bring in a private lender for the rest so we can present "all cash" offers....??   

The low or no money down is NOT going to be the properties that you are currently looking at. They are not listed on the MLS. They are the deals where people are behind on the mortgage or taxes or there are issues with the house itself.

THEN you have to find friends or certain family members(some are disqualified) who have IRAs or 401Ks from past jobs that they can lend you.

you are probably mainly talking to too good to be true scammers.. real estate requires capital.  its not realistic to think you are going to find 100% financing from anyone reputable.. you can for those that want to steal your application money.  you find them on BP and craigslist and linkdin and facebook.. 

or you need to really know what you need.. which is a transactional lender.. and pay the fee's for the mezz financing.. but again those guys will want down payment if your not flipping it.. 

or you need to source it directly as @Rick Pozos states and that in itself is a huge challenge given the literally thousands of wanna be wholesalers out there that all chase the same product..