To Whom Do I Lend?

The investors I lend to are a diverse group. Most are experienced but I have funded the purchase of one investor’s very first rental home and another’s first rehab project. (Both of these investors had significant personal funds in the deal. The rehabber owned a construction trade company and though this was his first personal project he had been involved in construction for 30 years.) I usually have an existing relationship with the investors I fund. Sometimes I have known them for years, sometimes for only a few months. I have met every one of the people I have funded at a real estate event, either a REIA meeting or a workshop. I have frequent contact with many through social media.I post regularly to my facebook page: www.facebook.com /damntherecession and am active on Linked In.

I consider most of the people I have funded to be friends. These are positive people who actively seek to better their situations. They have setbacks, as we all do, but they tend not to dwell on them, preferring to forge ahead toward their next success rather than complaining about how tough life is. They are fun to be around. The nights I spend at bars and restaurants with my partners are among my most enjoyable.

How do I evaluate a potential loan?

A bank or corporate hard money lender will have very strict guidelines and tests that must be met before they will issue a loan. I don’t, but I still must evaluate whether I will fund a deal and if so, on what terms? My decision is based on three factors: the borrower, the deal, and my plans.

Before I continue I’d like to clarify some terms.

Hard money is simply real money. Historically that meant gold or silver. Now, due to a form of mass hysteria, we accept peachbacks or their electronic equivalent as money. Banks, private lenders and Aunt Sue all lend hard money.

Hard money lender. This does not refer to a lender that lends at high rates or with difficult terms though there are certainly some hard money lenders that do both of these. A hard money lender, for our purposes, is one that will make a loan based more on the equity in a deal than on the borrower’s creditworthiness. I will use this term to refer to a corporate private lender, not a bank (a public lender) or an individual private lender. They will usually have formal application procedures and will charge application fees to consider the loan and other fees (origination fees, underwriting fees, etc.) if the loan is funded.

Points are percentage points. One point is one per cent of the loan amount. Loan origination fees are often stated as points.

Private money lender. I will use this term to refer to an individual private money lender. I have been a private money lender.

I am not your Grandma or your Aunt Sue who may lend to you long term at a couple points more than their money market account pays because you were a cute kid or you have had a rough time and just need a break (and a hug). Your family probably doesn’t know how to evaluate a loan and doesn’t really care to know how. I do.

Neither am I a loan officer for a hard money lender. A hard money lender has very specific criteria that a borrower must meet to get a loan. These criteria are usually much more lenient than at a bank but, still, if you don’t qualify you don’t get the loan. Hard money lenders may have shareholders, a board of directors or partners that will object strenuously if they do not adhere to their stated criteria. They may have licensed mortgage professionals who must follow legislated regulations. They know how to evaluate loans but are usually willing to weigh the equity in the deal, the collateral, more heavily than the borrower’s credit in their loan decisions. Be very leery about borrowing from a hard money lender that is only concerned about collateral. These may be “loan to own” lenders that are primarily interested in taking the underlying real estate and will not hesitate to do so. In fact, they are hoping you give them the opportunity to foreclose. Many of these types of lenders fared very badly during the last real estate contraction and many had business failures (I don’t feel too bad about that either). There are still some survivors and more may appear though the Dodd-Frank Act has convinced many reasonable hard money lenders to close up shop. Know who you are dealing with.