PLP-078 Loan Application Guide & Checklist

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Today’s episode is going to be geared for newbies or people who might be unsure how to start or where to kind of start the conversation with a potential borrower and it goes hand in hand with a sort of an announcement, I’m proud to announce. Happy to announce, relieved to announce that you can finally now get your copy of the private lenders loan application Guide and checklist over at the website, privatelenderpodcast.com and I’m going to kind of walk you through it a little bit today. So, if you have don’t have it yet. I would, you know, go get it and save this episode for later when you can sit down at a desk and kind of look through it. So if you’re running, driving to work, obviously you’re not going to be able to do those things or at the gym.

 

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GET TO A SAFE SPOT

So if you have to then go ahead and pause it and come back later. You can go to the Private Lender Podcast.com and just sign up anywhere, any sign up form that you see, name an email, fill that out and you will get the private lenders loan application Guide and checklist. And I put it together to kind of walk through a couple of ideas or themes and notions. And I’m going to go through those with you here today. I’ve always said that when it comes to a loan, I like to look at the person a their process and then the property. And that’s what I lay out in this, in this checklist, you want to know how much real estate investing experience they have if they’re just starting off or if they’re new, politely send them over to hard money lenders. That’s what they’re there for is to really help new people, new people, newbies, first-timers, be successful and let them do it with hard money, not yours.

LOOK FOR GRAY HAIR

That’s, that’s my suggestion. Look for what you’re, you know, if you have a borrow who’s been doing this for 20 years and they’re a flipper and they continue to flip, that’s great. That’s someone you might be comfortable with, especially if you have a good relationship with them. If you have a flipper or let’s say, let’s say you have a landlord who wants to go into flipping that process, I’m not too comfortable with because here’s somebody who has succeeded as or succeeded as a flipper, rehabber and now it’s to switch gears. I’m sorry, I just messed that up. Didn’t I? Someone who’s successful as a landlord, but now they want to switch gears and get some quick cash again. I would send them over to the hard money folks until they get a few flips under their belt. It’s a, it’s a little bit different game and I like to invest with people who know what they’re doing and stay in their lane.

So that is a touch on the person you want to know if do they have, what’s the record like in not just a criminal record or any, what was their record as a person do that? Have they been arrested a lot? You know, one or two times. Okay. Or not. I’m saying, okay, but what was the, what were the circumstances behind, do they have judgments against them? Have they been sued? Because here’s it. This is where it gets tricky because I, I’m trying to think of someone who’s landlord for a very long time who at least wasn’t threatened to be sued or contacted by attorneys, by tenants that know how to game the system so to speak. Uh, and I’m not trying to condone slumlords or anything like that. It’s just I know some good people who have been sued, uh, as landlords frivolously, but, um, unfortunately sued nonetheless.

BE JUDGMENTAL

So if they do have judgments or they have been sued, find out why. You know, are they behind on child support? Uh, you know, what, find out the reason. Do they have lousy credit cause they just got divorced or you know, have they had gone through a really crappy life event? Like, uh, someone getting sick or they themselves getting sick, but also want to note if the person that I’m loaning to has a reputation to uphold in their investing or their real estate investing community, that the, those things kind of help up help you mitigate risk so that when you go into the loan, it’s pretty much a no brainer, but that person is at the end of the day, you’re lending to a person. Yes, there’s a deal, there’s a property, but at the end of the day there’s a person and that’s where I think you should, you should start with at least that’s where I do and their process, like I said, what do they do?

Are they, you know, is this their 100th rehab flip or is this their 32nd rental property? Then you know, I have a comfort level with that. And then you look at the property and is it a, is it a property class that you’re comfortable? Is it single family is a multi, as a small multi, what is the deal? Most of this is going to be geared towards single family. This checklist that I’ve provided and the guide is loans towards single family. In the future I will have other property classes, but for now this is where I’m trying to follow the, the, the model of most people get into single family and then move on up. I’m trying to do the same thing with this podcast and with the checklist and guides and stuff like that. So, um, this is all going to be geared towards a single family flip or it could be an owner finance deal or it could be a landlord, a buy and hold, but you get to the last page and there’s basically the checklist.

WHO IS THE BORROWER?

Who’s the borrow? Who are they, what’s their experience? I like to see some type of portfolio of what they’ve done in a, an an investor profile. So basically what that means in what type of portfolio do they have, how can they demonstrate their experience? Can they show me some HUD statements, a loan application, a loan request applicant fill up, fill out an application, get the basics from them. If you’re lending to an entity, you definitely want to get the formation documents for the entity. Articles of incorporation, uh, another to DBA organization. Who are the players who’s involved under that name of, you know, real estate investor LLC. And for every individual that’s a member of the LLC or for every individual that I loan to, I asked for a copy of the driver’s license and social security card just in case. That’s kind of my little insurance policy.

I wouldn’t want a loan without knowing exactly having a state number or a federal number to attract these people down in case the worst does ultimately end up happening that way it’s, you know, you don’t run, you don’t necessarily have to run credit right off the bat. I like to let them do it through, uh, something that doesn’t Ding them on their credit, like Credit Karma or one of those sites. However, if things do go south, I’m going to be ready to act quick. And if I have a social security card and a driver’s license, I can do so.

The other option or let’s the [inaudible] option when I’m looking. The other thing, when it comes to the borrowers, can they repay the loan as agreed? You know, do they have enough reserves? Are they a full time real estate investor? If they’re not, if they’re, you know, if they have a full time job, then let’s, if they say, look, I like to request pay stubs just to see if the people are telling the truth. Most recent tax return as well helps out. It gets complicated with when people leave corporate world and can become a real estate investor because now they’re on bankable. So I want to see why they’re unbankable. I want to see that to prove that they’re in bankable. Uh, that helps me feel a little, you know, a little better with a person, especially if I don’t know them that well. But I tend to loan to people I know.

Not always, but I tend to. So you can also look for bank statements. I look for business and personal as well. I want to see if, if the cost, if the cost of the loan is going to cost, the price of the loan is going to cost them $5,000 for let’s say for a rehab flip. I want to make sure they’ve got the five grand ready to go and you know, and they can pay some draws up front. I love to see that brick construction draws. They’re ready to go. They’ve got money, so they’ll pay the contractors. Then they request a draw from me, so I’ll send out the inspector. They check it off, boom. We can wire the money, uh, usually within 24 hours to replenish the borrower’s bank account and to continue the, the Rehab of the property. I like to see additional personal assets, investments in investment properties. Again, back to the portfolio of the real estate investment experience. They have 401k’s four oh three bs pension stocks, bonds, mutual funds, whatever. Fidelity, Schwab, do they have cash if, if something goes south, do they have cash to make their lender whole? In the meantime, that’s what I want to see.

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I also want to have them execute a business loan disclosure, which basically says this loan is for a non owner occupant. This is a business loan to an investor. That investor cannot spend any time habitate the occupier habitate that property other than to fix it up, sell it or to lease it out to someone else. But that person, the person I’m loaning the money to cannot use that house as a residence because now that becomes a retail loan or a consumer loan and the rules change and the consumer’s protected much more than the business folks because the government and the laws basically assume if you’re doing business and you should know what you’re doing. And we all know that predatory lending does exist to certain folks and we saw it in the last downturn. So I always want to make sure they get, and I get an executed business loan disclosure so they know that they’re not allowed to live in the property.

BEWARE OF OWNER OCCUPANTS – THERE ARE DIFFERENT RULES!

If they do want to live in a property, that’s fine, but there’s a whole other avenue to go down, which this checklist doesn’t cover. So just want to tell you about them. Now on the property, I want to see the earnest money contract with all addendums and or assignments. I like to get local neighborhood statistics and I don’t necessarily require that from the the borrower. I hope that they have some of that in their due diligence in their package that they present and some of the documentation that they present to me. But you know you can make money in and high crime areas, you can make money in low crime areas. It just depends on what you like. I know people who buy houses for $20,000 lease them out and don’t have any contracts with people. It’s month to month and they pretty much know that at some point they’re going to, they’re going to have to evict and so they, they plan for it.

It’s not type of investing I want to do, but maybe it is something that maybe your one of your bars want to do and they’re comfortable with that and they know that there’s good money, there’s good cashflow in those types of properties if you know how to manage them. And if you get someone who can manage, operate, and manage them good, that are well then for the lender you’ll never even know as long as they make their payments and your pain is agreed to. Everything is fine. I like to see a scope of repair and or the bids, I want to see it all. I want to see who’s coming out to the property. Who’s, you know, is it their cousin who lays tile just throwing out some random numbers or is it, do they have a contractor that’s come out and said, okay, you want to flip or whatever.

PRIVATE LENDER’S LOAN APPLICATION AND CHECKLIST

This is what we’re going to do to get it to a habitable condition. This is what it’s going to cost. Does the scope of repairs do the repairs? Are they, are they appropriate for the neighborhood? That’s why I was allowed to look at the comps a as well, but don’t get, don’t get your comps from the borrower because they’re gonna, they’re gonna put lipstick on that pig. You go get your own comps or rely on the the appraiser. I also want to have permission to visit or inspect the property and access lockbox code or whatever that’s for local. Like I said, I start off, um, if you’re new, I suggest you start local before you cross county lines or state lines, but be able to go touch and see, smell the property that you’re, you’re investing in and putting money on first. So I want permission.

Just because I’m the lender doesn’t mean I can go to the property whenever I want. So I like to get permission. I also like to see a recent survey, the subject property I want to, I didn’t know that something is, is recent. When I say like, you know, five years is a, what I would consider fairly recent. As long as nothing has been constructed, torn down or anything else like that. Uh, I mentioned appraisal. You want to get your appraisal, you want to get an or a CMA, broker price opinion, something. I like to do my own comps. I’d like to dig into them. And usually appraisers will give links into your mls system that you can drill down into the photos and look at the, the furnishings and the treatments or the, sorry, the finishes on the property so that you’re, you’re not providing a, a retail loan or providing a loan to somebody who’s going to go into a house and put four mica or laminate countertops when the rest of the neighborhood is marvel. Vice versa. You don’t want to put marble in a neighborhood that everything else is going to be laminated. Do you want to know what’s around and make sure that your investor, your borrower is keen on that and that they’re not going to over or under serve the property.

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Yeah.

And it goes without saying. You’re going to get a copy of clear title commitment and the closer contact info. And then there’s the insurance policies. And what happens is you get binders a so the policies won’t incept until the day of closing. So you yourself won’t have the policy. But they insurance companies give what’s called a binder where they will say, okay, a upon closing this property insurance will be in place. Same thing. You definitely going to get a lender’s title policy for the full amount of your loan to make sure that you’re made whole in case, God forbid something happens.

Okay.

I want to see that evidence of property hazard insurance or the binder and the limits must be no less than 100% of the ARV and or anticipated listing price. And if it’s going to be a short term, I like, I like to see where it is going to be at least a six month policy put in place or some type of short term policy. I don’t mind lenders only getting a few, sorry. Borrowers only getting a few months of insurance when they’re going to be flipping a house and turning it fairly quickly. But while they do own it and while my money’s on that house, I want to make damn sure that they’ve got some, some property insurance hazard insurance there. And because I live in the Houston area now, I require um, flood insurance through FEMA, a national flood insurance program. It’s still dirt cheap, cheapest insurance there is out there. And a lot of people don’t understand that homeowner’s or landlord policies, dwelling policies do not cover flood from a hurricane or a river. They don’t cover flood at all.

INSURANCE IS NON-NEGOTIABLE

I like to see, like I said, I want to see those binders ready to go. I want to see what those limits of the policies are gonna be. Just so that, you know, they’ll say simple math and ARV of a house is going to be a hundred grand and I’m loaning 50 on it. I want to make sure that if anything I think burns down that

 

I like to see the a hundred grand there because the limit of a hundred grand for the ARV, not including the property because what I’ll probably should do an old episode on this, but there’s something called the Co insurance clause, which I believe I spoke about last episode.

Okay.

But if you don’t ensure at least 80 or 90% of the ARV or what the true property value is, if there is a claim, then the insurance companies will deduct, or you only get, say, let’s say if you insure $100,000 house for 50,000 and you completely get wiped out. Let’s say a hurricane comes through or a tornado and that hundred thousand is out, but you’ve put limits on for 50 all you get is 50 so if you’re the lender, maybe you get paid back. If you put 50 if you’re down, you know, if you’re only in there for fit 50 50 grand. Where it really bites is, let’s say that $100,000 home has a, and the borrower has only put a $50,000 limit or 50% of the value on insurance. Then there’s a $50,000 claim. Half of that house is damaged and has to be rebuilt. It’ll insurance is only going to pay for half of it.

That will pay according to the percentage of value that you insured. So that’s why I say, you know, get 100% of the ARV value, protects you, protects the borrower, and it’s just the next room, a little, a little cushion, so to speak in a, and we’re trying to keep the, trying to keep your money safe. So if you want to go get your private lenders loan application Guide and checklist, again, go to private Leonard, podcast.com and I’ve, um, I’m, I’m experimenting with this little pop up so that when it looks like you’re gonna leave the page, it’ll pop up and it’s a, it’s got all the wrong copy and everything on it, but I, uh, I’m going to try to change it here shortly, uh, but I just wanted to get it out there and get it into people’s hands and I like to know what you think about it.

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About the author, Keith Baker

My ultimate goal is to create an economy for Real Estate (and other) Investors where banks are no longer needed. An economy where every day people look to each other for leverage and support. During the day I am an insurance adjuster for the oil field, where I handle millions of dollars of other people's money (OPM), and by night I invest in Real Estate and host this podcast. I hope you have an excellent experience and find real value within this website and the Private Lender Podcast. Please leave comments or submit your questions on the Contact Page.

I wish you prosperous, safe and happy lending and investing!

Thanks for listening

-k

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