My last post struck a chord it would seem. I received lots of messages from brokers sick of the games that are often played in the private loan industry.
Who would of thought #removethescumfromprivatelending could get such a response.
The questions that I was asked following the post and the obvious increase of brokers entering this space suggested to me more education is needed. So over the next posts I will unpick this world for you that will hopefully assist you navigate it safely.
Lesson 1: Term Sheets: The devil is in the detail
At last, I hear you say, you have found a lender that wants to fund your loan. After all, they have issued a term sheet when so many other funders have said no. Why would anyone issue a term sheet for something they don’t want to do? Right? Wrong.
For some in our industry this is just a lure to bring the borrower in. A quickly produced term sheet following no analysis is your first sign of impending problems. The lender simply accepts the values provided by the borrower (even though he knows they are inflated) quickly issues a term sheet and says ‘yes, we will give you the funds on those numbers’. So where is the catch?
Well, to proceed with the term sheet some private lenders ask for a large upfront fee or they inflate the valuation fee so they are making money off an eventual no. They are also reducing the borrower’s options by wasting time.
But it doesn’t stop there, buried deep in some term sheets the terms allow the lender to caveat the borrowers property if the loan values don’t stack up. Clearly the Borrower or Broker has no control here and is exposed.
Ponder that one for a minute.
The Lender can charge you where they have decided not to proceed because their valuer gave them a different figure. When valuations come in less, the cost to the borrower has gone up by establishment fees being charged and interest even when no funds have been lent.
Tip 1: When negotiating a term sheet ask the lender to amend the terms so that if the lender doesn’t proceed for the full amount due to valuation related issues, no further costs are payable.
If they say no ask yourself why? You have paid for the valuation and they send an independent party to do it? Makes no sense unless there is a plan b waiting for you.
Keen to know more, check out the following links:
