How to find a legitimate private money lender?

Question

I’m getting to the point that I would like to start using  a private money lender. Talked to one through another forum.  But got the feeling it might be a scam. Any tips or recommendations are greatly appreciated. Thank you.

Andy Martin · Answer

Private Money. It sounds like a really good idea. And it can be. Or, it can be a mistake.

It’s a matter of trust. Both ways. You’re talking about a legal transaction. There’s money involved.

There are lots and lots of moving parts. There are so many variables.

Borrower:

How do I know with certainty the private lender’s understanding of this industry? Me? My business? This market? etc.

How do I know with certainty the private lender has the funds to fully meet their obligation/promise?

How do I know with certainty that an “act of God” or other unforeseen set of circumstances will not affect the private lender’s ability to fulfill their obligations.

How do I work out loan advances?

Who will compute the interest payments?

How do I receive receipts for my payments to the private lender?

Does the private lender report these transactions to the IRS or do I?

Will the private lender place all of the money in escrow for the title company to release?

What type of ongoing documentation for repairs and soft costs will this private lender require? and when?

How do I know the private lender won’t be a micro-managing lender?

What if I run into unforeseen issues and need more funds—or need to extend longer than anticipated?

What if this deal doesn’t work out as planned? How is the lender going to react?

You will need to spend time/money to verify your private lender. Background check. References. Criminal record check.

Request and review financial data.

You will need to locate an attorney that has experience with drafting loan documents which adequately protect both parties.

You will need to hire an attorney to review documents on your behalf.

Add up the additional time/effort and expense required to find and negotiate this arrangement, then be sure to negotiate all points, interest rate, closing costs and any other fees, to ensure your overall costs are less than working with your local bank or a reputable, industry lender.

If you find the “right” banker or lender, you just might realize benefits far beyond saving money paid on interest. Some lenders and bankers can become “partners,” providing invaluable advice for you and your business; a sounding board to discuss ideas, problems, challenges; ideas for growing your business, adding partners, etc.

Hey. Just some thoughts. I’ve been where you are.

Connor Myllymaki · Answer

@Derek Dombeck thank you for your thoughts

Derek Dombeck · Answer

Private money is usually easier in your local market and face to face with people. After you are established and have a track record, it gets easier to meet potential investors in forums.