5 More Questions to Ask Before Investing With a Hard Money Lender

Last month I wrote about five questions that should be asked before investing with a hard money lender. (June 2009.) This month we look at five more questions with more depth. They should be asked after the first five questions are answered adequately.

1. What happens if a loan goes “bad?”

Most people think that business will always be smooth. Experience tells us that at some point a loan will go bad. When this happens, who is responsible for collecting interest, loan extension fees, or foreclose on the property owner? Is this your responsibility, or will the hard money lender take care of this?

What about the cost of collecting? Who pays for legal fees, registered mail, court filings, etc. if a loan goes into foreclosure? Will the lender who arranged the loan pay in full, in part, or not at all? Will the lender take the time and energy, and make the effort necessary, to go after the capital, interest, and penalties or do you need to do that yourself? Do they have a process in place, including a lawyer who can foreclose at a reasonable cost?

There is a huge difference between collecting a loan on your own and having a responsive, knowledgeable company do it for you.

2. Can I call references before I invest?

A reputable company takes pride in its professional reference list. For a hard money lender this list could include accountants, bankers, escrow agents, real estate agents, and lawyers.

If the lender does not have a list, ask "Why not?” The answer should be, “Because we haven’t put one together yet. Give us a day and you'll have it.” If not, then ask yourself if someone without professional references is someone you want to do business with.

When you have the list, call the references and ask more questions to make sure the lender is a professional & trustworthy organization.

3. How does a loan close and does the property have a proper lien?

Does the loan close with a title and escrow company (or with an attorney, depending on local laws?) Is title insurance purchased so if title problems occur the title company pays to have them fixed? Was a title search done and all other title issues identified and paid off, or resolved during the closing process?

Once the loan closes the lien needs to be recorded to ensure that the loan is in first position, ahead of any other liens to ensure that it is paid off first in the event of a foreclosure.

4. How does the hard money lender make money?

Is the hard money lender a broker, making money regardless of the quality of the loan and a successful outcome of you being paid back? Or does the hard money lender act as a principle in the transaction, making money with a successful outcome and potentially losing money if there is a problem with the loan. Does the lender give you a fixed of return regardless of the loan outcome?

How the hard money lender makes money will have a tremendous influence on the manner they conduct business: loan quality, borrower quality, risk, recovery systems in place, and who they borrow from. What is your risk vs. their risk in the loan?

5. Does the lender have a private placement that discloses your company’s financial statements and business plan, and what are the licensing requirements for the business?

It is possible that not all hard money lenders will be required by state or federal governments to have a private placement to raise or broker capital. However, if they have a private placement it should explain their business and disclose risks. It means that they take their business seriously enough to put together a plan and pay to register with the proper government regulatory agencies.

The licensing requirements discussion should disclose if they are even aware that requirements exist or not. If they don’t know, it means that they don’t take their business seriously enough to make inquiries. If they do know and they need to be licensed, they should be able to provide documentation to confirm their license.

Bonus Question

10.5 What is your reputation with your clients?

Their reputation should be good, with clients coming back for repeat business. They should offer clients as references, including clients whose loans did not go smoothly, and a workout had to be arranged. How was it worked out, is the relationship in tact, and would they do business with the hard money lender again?

A lender’s relationship with its clients says a lot about the lender.

Tell Me What You Think about investing your money with hard money lenders. I know that there are HORROR STORIES out there!! Sthare the best one you know.