How Do You Spot a Bad Lender?

Question

I’ve been thinking a lot about how much a lender can make or break a deal. You find some who are responsive, clear, and actually make things easier, they get you the funds on time, answer your questions without rolling their eyes, and don’t surprise you with hidden costs. But then there are others… the ones who slow everything down, tack on unexpected application fees or processing costs, or just have terrible communication that leaves you guessing and stressed out.

I’m curious  which lenders have you worked with and had a bad encounter? Was it the fees that made you hesitate, the lack of transparency, or just that they weren’t on the same page when deadlines mattered? How did you realize it was time to move on, and what lessons did you take away from that experience?

I think sharing stories like this is super helpful, especially for newer investors trying to figure out who to trust. It’s amazing how one good (or bad) lender can change the whole outcome of a deal.

Jeff Hamann · Answer

I'd say that one investor's bad lender can be another investor's great lender.

Some lenders are out to pitch potential borrowers on the "lowest rate", but when you get around to all the extra fees and costs not included in initial discussions, they're way less competitive than someone with a higher rate.

Key is to always just straight-up be direct, ask the right questions about fees, costs, timing (I'd list this one twice for any kind of construction loan!), and also about who works with you each step of the way (before and after closing).

If you get a bad feeling, or they don't know how to respond to these topics, it's frustrating but at least you see the red flag early and can adjust accordingly. Better to restart your search than be stuck with something that won't pencil for you.

Erik Estrada · Answer

I think the investors that suffer from this the most have very little experience financing properties is what I have seen in my experience.

Logically, calling 100 lenders and plugging rates and fees into a spreadsheet and going with the lowest one seems like the easiest path, but it never works out so easy. You might get lucky and get an honest lender. But truthfully, a lot of loan officers at the end of the day are salespeople. Some operate with integrity. Others do not. If you miss this, you will almost certainly get burned.

As a newer investor, your primary focus should be to build a relationship with lenders or work with a trusted broker that already went through the headaches with experience. A lot of investors like to "save" on broker commissions, but they are really just putting their project at risk. It is very easy for a direct lender to take advantage of a not so savvy investor without them really knowing. After all, lending is very complicated, has a lot of moving pieces, and there is definitely a learning curve that comes with experience.

As a broker, I built all of my relationships with lenders through repeat business, referrals, and doing a very deep due diligence on both my clients and lending partners. Unless you are closing more than 20 flips a year, it will be challenging to get the same relationships brokers have closing 100+ units a year.