Due diligence checklist: funding your first private real estate loan

Funding your first private real estate loan is mostly an exercise in asking the right questions in the right order: who originated it, who is borrowing, what secures it, what the documents say, how it closes and who manages it afterwards. This checklist walks through each area so nothing important is missed. Use it alongside your own counsel, and remember that all lending involves risk, including the loss of principal.

1. Before you look at a loan

Define your criteria. Loan types, maximum leverage, markets, loan size, term and borrower profile. See building a buy box.
Decide how you'll hold loans: personally or through an entity, and with what tax and accounting treatment. Ask your advisers.
Set your limits: how much capital per loan, per borrower and per market.
Line up counsel who knows business-purpose real estate lending in the relevant states.

2. The originating lender

You're relying on the lender's underwriting, documents and servicing.

Track record: years, loans originated, loan types and markets.
Problem loans: how many, and how they were resolved.
Written underwriting standards and how exceptions are approved.
Licensing for the states where it lends.
Servicing: in-house or third-party, and how reporting works.
References from other capital partners, where available.

Our guide to evaluating a private lender goes deeper.

3. The borrower

Borrowing entity: formation documents, good standing, signing authority.
Guarantors: who guarantees the loan, and on what terms.
Experience: completed projects similar in type and size.
Credit and background checks, including litigation and prior defaults.
Liquidity: cash to cover the down payment, reserves and cost overruns.
Business purpose and non-owner-occupancy documented. See business-purpose vs. consumer loans.

4. The property and value

Independent appraisal ordered by the lender, with as-is and, if relevant, after-repair value. See how to read an appraisal.
Comparable sales that are close, recent and similar.
Leverage within your limits: LTV, LTC and loan-to-ARV. See LTV vs. LTC vs. ARV.
Property condition, photos and, for renovation loans, the scope of work.
Market: how liquid it is and how long similar properties take to sell.
Flood zone and insurance requirements.

5. The loan

Term sheet: amount, rate, points, term, extension options and fees.
First lien position.
Exit: sale or refinance, with evidence, and a backup.
For construction: budget, draw schedule, holdback and interest reserve. See construction draw management and interest reserves.
Default terms: default interest, late fees, cure periods and guarantees.

6. Title and documents

Title commitment: requirements and exceptions reviewed, no prior liens left in place. See title commitments.
Lender's title policy naming the lender with successors and assigns.
Note, mortgage or deed of trust, guaranty and loan agreement reviewed by counsel.
Insurance naming the lender as mortgagee and loss payee, with adequate coverage.
Assignment documents, if the loan is assigned to you rather than closed in your name.

7. Closing

Funding mechanics: how and when your money moves, and to whom.
Wire instructions verified by phone with a known contact. Wire fraud targets real estate closings.
Recorded documents confirmed after closing.
Final title policy received.
Closing statement matches the term sheet.

8. After closing

Servicing agreement: who collects payments, manages draws and handles extensions and defaults.
Reporting: monthly payment reports, draw reports and insurance and tax monitoring.
Decision rights: who approves extensions, modifications and enforcement.
Maturity date in your calendar, with a check-in well before it.

A worked example

Hypothetical example, for illustration only.

A family office funding its first loan receives a $650,000 bridge loan file. Working through the checklist, it finds the appraisal, title commitment and term sheet in order, but the insurance certificate doesn't name the lender as mortgagee, and the title commitment shows an old mortgage with no payoff requirement. It asks the lender to fix both. The insurance is corrected and the title company adds a payoff and release requirement. The loan closes a few days later with the issues resolved, instead of being discovered after a problem.

That's the value of a checklist: catching ordinary problems while they're still easy to fix.

Key takeaways

Diligence covers six areas: the lender, the borrower, the property, the loan, title and documents, and servicing.
Most problems on first loans are ordinary and fixable if caught before closing: insurance, title requirements, missing documents.
Verify wire instructions independently on every closing.
Know who manages the loan after closing and how you'll get reports.

Frequently asked questions

What documents should I review before funding a private real estate loan?

At minimum the term sheet, appraisal, title commitment, borrower and entity documents, guaranty, insurance and, for construction, the budget and draw schedule. Your counsel should review the loan documents themselves.

How long does due diligence take on a private loan?

With a complete file and clear criteria, a single loan can often be reviewed in a few days. Missing documents and unclear answers are what make it take longer.

Do I need a lawyer to fund a private loan?

It's strongly advisable, especially for your first loans, to review the documents, how you'll hold the loan and the rules in the property's state.

How Lender Capital fits

Lender Capital sends capital partners only first-lien, business-purpose loans that fit their criteria, each with the full file: appraisal, title commitment, term sheet, borrower documents and, for construction, the budget and draw schedule. You review it, decide, and fund the whole loan directly. Capital partners pay no fees.

See how it works for capital partners, or request access.