In the previous article, we talked in detail about the tell-tale signs of hard money scams. They might range from advertising unusually low rates to purposefully obscuring the lender’s cost structure. However, what’s more important is to understand how to avoid hard money scams by selecting a reputable private lender, and this is what we would focus on today.
I remember watching a television show where a president of a large hospital was selecting a surgeon to treat his own brain cancer. He was looking at the death number per patient for several leading candidates. He rejected the surgeons with the highest mortality rates – because of the implication that they might be lacking in skill or luck. He also rejected those with the lowest mortality rates. In his mind, those doctors might have been too conservative and chose only the healthiest patients with the highest likelihood of survival. He wanted to doctor who was not overly conservative and willing to responsibly push the envelope. Selecting a private lender can be as tricky as selecting a brain surgeon since each transaction is as unique as each patient.
To avoid hard money scams, ask for a recommendation.
Talk to someone who worked with hard money lenders before and ask about their experience. If they had a good experience, ask for the lender’s contact information and whether you can mention the name of those recommending them. If they had a bad experience, talk to them about what went wrong and use it as a learning moment of what could happen during the process.
Choose to work with a local lender.
There are several reasons why you want to work with a local private lender. First of all, real estate is a local business. If you’re thinking about buying a home in Washington, DC, you wouldn’t want to work with a real estate agent based in Florida no matter how qualified you are. You want someone who both knows the area and you can build a personal relationship with. These are the same reasons why you would be better served by a local private lender.
Another reason to work with a local lender is that their local reputation is paramount for their business. If you are operating only in a couple of states and not treating your clients right, the word would get out sooner or later. On the other hand, if you are a national lender lending in all fifty states and headquartered God-knows-where, it’s easy to muddy the water. Think about if you are working with a lender on the West coast and something goes wrong. Chances are you won’t be even able to reach a decision-maker and would be bounced from the department to department as a ping-pong ball no one wants.
To avoid hard money scams, check the lender’s reviews.
Checking online reviews is a good alternative to getting a personal recommendation. Obviously, you want to work with a lender with the highest reviews, but also make sure that the rating is based on as many reviews as possible. The highest number of reviews, the more confidence you can have in them. Be sure not only to look at the overall rating but also read the reviews themselves. It might give you a better feel for the lender and what differentiates it from other alternatives.
Talk with your potential lender of choice about their servicing.
Unlike conventional lenders, your work with your private lender would not seize once the loan is closed. Quite the opposite, your work together will probably intensify as your property is going through the renovation process. Servicing is what typically differentiates one private lender from another and provides (or subtracts) value from the whole rehab. Yet, few borrowers concentrate on this part. Think about it: if you’ve got the lowest possible rate but your lender dilly-dallies, penny-pinches or plays games with each draws, is your deal still as good as it seemed prior to closing? So to avoid hard money scams, do yourself a favor and quiz your lender about the servicing process.
New Funding Resources offers private hard money loans to real estate investors in Virginia, Washington, DC, and Maryland. Our experienced underwriters can be reached at 240-436-2340.