Truth be told, the hard-money or private lending industry, like every industry, has a few bad apples. But the good news is they are not the norm AND there are easy checks you can do to weed them out when you are looking for a fair and ethical lender. Here's what to look for......
Key Qualities to Look for in a Hard Money Lender
Here are a few key qualities to look for:
- Honest rates: Hard money lenders charge more than banks do, for several good reasons. Hard money lenders will lend to developers and flippers primarily based on the value of the properties rather than on the credit ratings of borrowers. Banks lend to the most creditworthy borrowers and so can offer prime rates. Real estate flipping is also a riskier proposition than simply buying a home. So, greater risk to lenders = higher rates. Hard money lenders must also charge enough to account for the occasional default. The loans are overcollateralized, but some deals do go South and recouping a bad loan is costly and timing consuming. A good hard money lender is not going to tempt you with bait and switch single-digit interest rates. Red Flag: If the rates are not in the 10 to 18 percent range, watch out. Rates below 10 percent raise the chances that the lender will hit you with hidden fees or a low-ball loan-to-value ratio. Also, beware of lenders who don’t clearly define their APRs – chances are they are hidden for a reason!
- Developer experience: The best hard money lenders have solid experience as developers and builders. They understand which projects are likely to succeed and the knowledge to help the borrower every step of the way. That’s worth a lot! An experienced lender bases its offer on a careful review of the property, the project, the neighborhood and the financial requirements. It will want to see supporting documents, such as sales contracts, business plans, corporate documents (if appropriate), budgets and schedules. Red Flag: While most lenders have a streamlined application process, be suspicious of a hard money lender who is willing to lend you money without first evaluating the application and inspecting the property. It takes a few days for a lender to perform due diligence. Lenders shouldn’t give you an unconditional approval in five minutes -- that’s downright fishy. Also, stay away from lenders who claim that they will fund anything. Reputable lenders occasionally turn down projects that are too risky. If the lender makes outrageous claims about funding every deal, better skedaddle.
- Third party accreditation:The private lending industry has an association, the American Association of Private Lenders (AAPL), "defined by a set of clearly defined and well organized principles of cooperation, education, ethics and accountability." Look to see if your lender is a member in good standing. Members are subject to ethics review, follow industry best practices, and take continuing education in the private lending field to keep up on the latest trends and issues in the industry. Look also to organizations such as the Better Business Bureau, for indications of legitimacy – since you have a choice among lenders, why not pick an accredited one with an A+ rating? Borrowers are advised to research competing lenders, through testimonials and customer reviews, and winnow out the questionable ones. Red Flag: You should be concerned about a lender who chooses not to join the BBB or has a low rating from an independent third party, such as TrustPilot.
Walnut Street Finance is a leading hard-money lender in the Washington DC region. We have decades of experience as a builder, developer and lender. We are a member in good standing of the AAPL and are BBB-accredited with an A+ rating.