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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   June 2006

Know Your Hard-Money Lenders

Ask these four questions to ensure your lender can meet your borrowers’ needs

I am amazed at all the new hard-money lenders appearing in the marketplace. It’s understandable, of course, why companies want to enter the hard-money side of the industry. It offers great opportunities to meet a demand, to create a revenue source and to diversify. But as this market grows, I hear a lot about brokers encountering challenging situations with these lenders.

Brokers should ask some general questions during their first contact with a hard-money lender to weed out the pretenders from the real experts.

1. In what kind of loans do you specialize?

Usually, experienced companies specialize in certain loans. You do not want to work with a “jack of all trades, master of none.” If the lender can’t do the loan or if it doesn’t have a potential investor, you could be wasting your borrowers’ time and risking a possible payday.

For instance, many hard-money lenders have no clue how to do construction loans because these loans involve so many elements — from understanding what is workable to knowing how construction-draw payouts are distributed. Land loans also can be difficult for some hard-money operations because private investors often aren’t comfortable doing them.

Lenders should be upfront with you if they are unfamiliar with these specialized loan types. You don’t want a lender that will start a daisy chain of other brokers trying to do the loan.

Listen to what is being said so you can protect your borrower and yourself. Ask about any indecisive or noncommittal remarks. If the answers do not measure up, you may want to go elsewhere.

2. Where do you get your funds?

Understanding how the loan will be funded is important. You should confirm that the lender has a legitimate private-investor source to fund the loan. Find out whether you are working with a broker or a direct lender that is funding off a credit line.

Unfortunately, there are many companies that don’t have any investors or the ability to do your loan. Try to figure this out right away. Your instincts will take over. Go with your gut feeling.

3. How long have you been around?

It is a red flag if the lender becomes defensive or uncomfortable with this question. This inquiry helps you gather information about the company. For instance, is it an A-paper shop that is doing this as a sideline? Has the company been around for many years? Will this lender run to a “real source” to try to broker your loan?

The lender should try to educate you about what to expect from the process — the time frame, the steps to take and more. 

4. Are there any special circumstances about which I should know?

Get everything on the table. You don’t want surprises. One mortgage broker, for example, recently had a $65,000 owner-occupied loan. He was told that the loan was “a go” and that he would receive two points. He then got a call back from the hard-money source telling him that for the company to do the loan, the broker could only be paid one point. (This was because a state predatory-lending law affected how much the lender could make on the transaction.) The broker was livid. He should have been told about this upfront.

•  •  •

Don’t be afraid to ask questions. You have a responsibility to your borrower to do a good job. Professional hard-money lenders understand that you will have questions. They will work with you. They should realize the importance of establishing a relationship with you for future business.

You can make a nice income with hard-money loans, provided you working with a lender that is professional and that wants to help you.



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