FIND THE BEST DEAL. After you have found a short list of legitimate lenders, your best scenario is to complete an
COMPLETE DUE DILIGENCE. After you have found a few private lenders that advertise the kind of loan parameters you need,
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application with each of them. You won’t necessarily need to do this for every deal after you’ve narrowed down a few lenders that check all the boxes, but for the first few deals—or when your deal has marked changes from previous transactions—it can give you an idea of what the range is. When evaluating the loan terms, decide what factors are most important to you. While interest rates, fees, down payment, and days to close are likely at the top, there are other factors that you should consider, includ- ing (but not limited to): • What are the processes and costs if you need an extension or increase? • How and when will you make payments? What are the penalties and processes if you are unable to make them? • Is there a draw request process? What does the lender evaluate to approve them? • Does the lender have requirements for how you protect the property (type of insurance, on-site security, etc.)? • What reporting or updates does the lender require? • Does the lender allow a junior lienholder, and what are the notification/approval processes? • Are there conditions that allow the lender to renegotiate or revise the loan terms, and what are they? Not all lenders will have requirements in these areas. Some may have other covenants not mentioned here. While not necessarily red flags, these details determine how easy it will be to hold up your end of the loan in best- and worst-case scenarios. Outside of the contract, think about what working with each lender is like. Are they easy to get ahold of? Are they willing to explain things to you? What does your gut tell you the working relationship will be like? While this process may seem time consuming, it not only ensures the safety of your identity and hard-earned cash, it shows you care about the details, which can be reassuring to experienced lenders. Think of this not as going through the effort just to close one loan, but to find a partner, or group of partners, that will help you scale your business. •
take a mental step back. It can be tempting to jump right in or get attached to the idea that if you do not apply right away, the money might disappear. Those are feelings that fraudulent lenders capitalize on. Watch out for the follow- ing red flags as you investigate the company.
Red flags prior to completing an application: • The lender pressures you to act quickly.
• The lender charges an unusually large application fee. • An internet search of the company name turns up a different website address or contact information than provided. • You are unable to verify the company’s status in a Secretary of State business search in the state the lender is doing business. You should also reach out to the company via the official contact information and see if you reach the same lender. • The lender advertises licensing that you are unable to verify with the applicable licensing board. • The lender advertises being a member of the American Association of Private Lenders, but AAPL is unable to verify membership or shows different contact information for the lender. Red flags after completing an application: • Excessive or unexplained fees, interest rates, down payment and/or points. • Loan terms that seem too good to be true, which can be a sign of bait-and-switch. • Requests to submit money through PayPal (or, absent a verifiable title company, wire transfer). • The absence of common loan closing documents. From the lender this may be disclosures and sales contract/settlement statement, or the lender may seem unconcerned with collecting insurance binders, construction permits, operating agreement, or IRS EIN. • The absence of an appraiser or verifiable titling company in the closing process. If at any point you find that you have been working with a scammer and have provided sensitive personal infor- mation, treat it as identity theft. Report it to local law enforcement, your district attorney, your state Attorney General, and the Federal Trade Commission. While there are very few scammers compared to legit- imate private lenders, it is still best to be cautious and thorough.
30 | think realty magazine :: august 2020
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