Hard money lenders SCARY?

[Valerie Smith]

☀️I’ve seen a couple posts about people being approved for hard money, then the lender backs out or changes terms etc. I’ve also been warned that some hard money lenders can be a scam. I invest in Florida and Georgia and would like to know which you recommend. Called Lending One and because we’ve never used hard money they said we’d have to do 15% down plus 2 1/2 points, Interest (starts at) 11.5% plus some other fees. These were quotes without pulling credit or filling any paperwork out. Anyone used them or think these are good rates for a 1st time user? I kind of thought one of the points of using a hard lender is so you don’t have to put so much down.

[Timmi Ryerson]

There are scammers out there who will offer interest in the 6-7% range.  They will ask for some documentation and then send notice that you have been approved but need to sent $4000 for mortgage insurance until you are able to sell or refinance.  Those are the scammers...never send money as Ryan Blake said. And beware.  Many of them advertise as Hard Money Lenders on Linked In.  They have unusual phone numbers (satellite phones) and also heavy foreign accents but they will talk a good talk.   

[Tina Jenkins]

@Jay Hinrichs Thanks.

[Don Konipol]

@Timmi Ryerson makes an excellent point.  Many people professing to be hard money lenders are outright scammers or run their business in an unethical way.  Of course this reflects badly on ala HMLs, the vast majority of which are legitimate businesses.

Unethical HMLs fall into three different methods of operation

1.  Outright scammers - these guys never intend to make a loan.  They make their money by collecting various commitment, due diligence, site inspection and underwriting fees up front.  I testified as an expert witness against one who had collected $100,000 upfront when he claimed that he would need to hold the down payment money!

2. The ones that approve your loan at 11% with 4 points, and at closing you find out that in addition to the 11% and 3 points you owe another $7500 in previously undisclosed fees.

3. The ones that ‘approve' your loan at 80% LTV and 7% interest with 1 point. The day before closing you're told that some detail of the property previously undisclosed was revealed in the appraisal, and although the lender rather not make the loan, they feel bad for you, so they're willing to make the loan at 14% interest and 6 points, at 60% LTV.

Most times these unethical characters try to cover themselves legally by having ‘subject to’ language in their loan approval letter, as in subject to a satisfactory appraisal, subject to no change in market rate of interest, etc.  what’s confusing is that all lenders need to make their approvals subject to these same contingencies.   The difference is that legitimate lenders operate in good faith, scammers don’t.  

[Altie Jenkins]

@Ryan Blake This is extremely helpful Ryan. Thank you

[Grayson Wester]

@Valerie Smith this is a great post. There's a lot of bad press regarding hard money lenders out there (and for good reason). As a hard money lender myself, this is something I have to work against on a daily basis. There are crooks in every industry, but the lending sphere is definitely one that is rife with companies that have a very short term view on developing relationships with their clients (e.g. taking advantage of a new client on the first deal to make a chunk of money, but lose a future client and get a terrible reference). However, there are also a bunch of great hard money lenders out there (large and small) that are looking to make an honest living and offer great value to their clients.

Here's my encouragement when shopping for one:

• Ask lots of questions! Good questions are a sign of a serious borrower and an honest lender recognizes that and welcomes it. If they're an honest lender they'll have nothing to hide and will break the lending details down in a way that you can understand without needing a finance degree.
• Ask for referrals from their current clients. These are the folks that will give you an honest look at how the business is run.
• Ask for referrals from experienced investors in your market. A good hard money lender is worth their weight in gold and will truly be an asset to your business as @Mark Sewell said. Investors that have vetted a hard money lender and used them more than once will be more than happy to refer them.
• Do the math! Every lender is offering some different kind of value. One might lend up to 70% ARV (anything you can fit in that amount), but charge you 12% and 3 points. Another might do 90% of purchase price (10% down payment) and 100% of rehab, but be at 10% and 2 points. There are advantages and disadvantage with every lender, but my encouragement to all my clients is to do the math and figure out how much the loan will actually cost you when all is said and done. Be informed!
• Get clarity on any fees that are charged at closing, during the loan and on the back end (when you sell or refinance). Things may seem rosy up front, but then could get way less appealing once you're in the deal.

Regarding good questions to ask, here are some basics that you need to make sure you cover with any lender you talk to:

• What are the terms? 
  • Max loan to value (LTV)?
  • Maximum loan for rehab money?
  • Maximum loan towards purchase price?
  • Interest rate - is it variable or fixed?
  • How do the points work? When are these paid?
• What is the length of the note? Are there prepayment penalties?
• Monthly payments? Interest only or principal and interest?
• If borrowing rehab money, how does the draw process work?
• Do they require appraisals or BPO's? Who pays for those?
• What fees can you expect throughout the life of the loan?

Obviously there are a multitude of questions you can ask, but these will give you a pretty good idea of what you're signing up for when vetting a hard money lender.

[Valerie Smith]

@Grayson Wester thank you so mich. this helps!!!!