Private Money Lending Qualification

[Tucker Cummings]

I was reading one of the trending posts this morning where a user was discussing unfortunate circumstances where they were taken advantage of by somebody she lent money to. Unfortunately, it looks like that forum is turning into a "can't believe you would do that, you should've known better, you should've done this or that or XYZ." Maybe its just me, but I'd love to know how these investors we're able to get to where they are today without making any mistakes.

Anyway, I thought we could open up a discussion here about how one would go about vetting an investor they are going to lend money to. I'm new, haven't done anything with private money before, so would love to know what someone on the other side of the table would want to see in me before lending money. 

So, "What processes do you have for qualifying someone before lending to them?"

[Brian Geiger]

@Tucker Cummings,

Here is how I would vet sponsors/investors of any deal:

1. Check the track record. I want to know the returns on those deals and what strategies led to those returns. What I am looking for is consistency and not just on and off good returns. If a sponsor/investor does not have experience, I want to know who is on the sponsors team and are they working with someone who is experience in the investment. I would usually vet the person with experience's track record. In addition, I'm more likely to invest in a sponsor with out experience's deal if they have experience running a successful business.   

2. Check references: I hear this one a lot but more and more private lenders are not checking references. I normally check with three (3) references before lending any money. Again, someone who is not experience, I would see who they have on their team and if they have business experience before I lend money.

3. Underwrite the Sponsor's deal: I would get all the details of the deal and either get a professional underwriter to underwrite it or if its a niche im familar with, I would do the underwriting myself. A lot of times its not the sponsors but the deal that is bad. However if the sponsors want to bring in private money, they should do a better job underwriting and if the sponsor had not taken to effect certain risk (market changes, political events, migration loss, etc.), I'm going to pass on the investment. 

4. What is their brand and thought leadership platform like? This isn't a requirement but I big plus.

5. Have to be full time in the investment deal in order for me to invest with them. I don't want someone who has a 9-to-5 job and trying to invest in RE. They need to be full time in the business. 

6. In Syndications, I like performance based metrics. What this means is that I want to see the private investors make money before the actual sponsor make money. With that said, I want to see preferred returns around 7 % or higher to the private investors that are cumulative, equity splits between 70 (private Investors) -30 (Sponsors) or 60 (Private Investors)-40 (Sponsors). I'm not interested in 50-50, 90-10, and 80-20 splits because there isn't any incentive for the sponsors to do well in the deal. Once these metrics are met, I'm for the sponsors making money in the deal. 

I hope this helps.