Do your due diligence on hard money lenders or else
Real estate investors and those wholesale houses are often so relieved to find a money source to lend them today that they’ll rush to sign on the line as soon as a hard-money lender says yes. However, there are very good reasons for borrowers to research their lenders almost as much as they do when applying for a loan.
Some property investors and wholesalers may find this disconcerting if they have never had a problem with a mortgage lender before. However, it’s obviously much smarter to take preventative action first, rather than after an extremely costly mistake.
The United States has recently seen a significant and welcome increase in the return of lenders to the market, including hard money and rehab lenders. Many, including commercial mortgage companies trying to get into the fray, are getting very aggressive in competing with each other to lend investors their cash.
In many ways, this is exactly what real estate investors, the housing market, and the US economy need to experience phase two of the recovery. However, with everyone in the world trying to cash in as private or hard money lenders, it obviously also invites its fair share of amateurs, who, even if they mean well, may not be positioned to execute really well.
Recently, this has been seen in individual investors flocking to online real estate forums to complain that some of these parties are running out of cash and unable to meet their own loan terms, and the recent big bank debacles they should be recent enough to keep most on their toes.
For these reasons, those renovating homes, selling wholesale properties, and building rental portfolios must do their own homework.
This begins with selecting a lender to apply for a loan. References are a great place to start. In the absence of references research options online.
Consider requesting proof of funds letters and verify them independently. If lenders are supposed to finance the money in additional tranches, make sure these funds are deposited into a third-party escrow account at closing. Don’t be fooled by promises of what a lender “could” do in the future when your loan balance comes due or you need more cash. Some unscrupulous lenders and loan officers will promise anything to make up your numbers. Plan for the worst case and hope for the best. Take care to check all closing documents and make sure they are what was promised in advance.
Finally, recognize that there are actually many alternatives today, so find the right option and a lender you can build a relationship with for regular business.