Whether you are diving into the real estate investment market or you are a seasoned investor, you may be exploring the benefits of working with a hard money lender. While traditional banks provide funding using rigid thresholds to assess the borrower’s current financial condition, hard money lenders have more flexibility.
Because hard money lenders are backed by private investors and their own money, there is more leeway when it comes to loan criteria. Hard money lenders assess borrowers on the basis of available cash, credit, the future value of the property after it has been repaired or built (i.e. repair value or ARV), and the more important: real estate experience.
This doesn’t mean that it’s “easier” to get a hard money loan – just different. But it does mean that when you choose a hard money lender, you are choosing more than a funder. You choose a business partner. And to avoid a bad deal, you’ll want to rate your lender like you would a business partner. Read on to find out how.
Choosing the best hard money lender
When choosing a business partner, you consider their experience, strengths, weaknesses, and whether you feel comfortable working with them. You will want to ask and answer similar questions about your lender.
Choosing the right hard money lender requires doing your research and asking the right questions like the following:
1. Does the lender specialize in hard money?
If this seems obvious, it’s because it is. However, it is easy to confuse private investment lenders or independent brokers with hard money lenders. The main difference is that hard money lenders operate more like an institution with experts who specialize in servicing, granting and closing hard money loans.
To the untrained eye, these loans seem simple, but they are actually quite complex and require proper structuring to ensure the smooth running of the loan process.
2. Is the lender local for the property you want to buy?
One of the reasons that big banks don’t usually fund flip projects, new construction or other projects that hard money lenders specialize in because they lack the ability or desire to assess and risk future value.
On the other hand, hard money lenders view project equity as their hedge against risk and speculate on future value. To achieve this, proximity and local expertise are important.
Choosing a local lender makes the whole process easier. If you choose a lender who is unfamiliar with the market in your area, you may need to spend time educating them on the intricacies of your municipality and local trends instead of flipping your property.
“Real estate investing is a block-by-block business,” said Kevin Rodman, managing partner at Asset Based Lending. “In some cities, a few blocks in either direction influence the ratings by 15-20%. You want a partner who understands the difference and who knows the details of your micro-market.
In addition, a lender with boots on the ground may offer valuable information in a specific neighborhood or property that you monitor, including recommending trusted service providers and partners.
3. How quickly can the lender approve the loan?
If you are on a schedule – and this describes all real estate investors – using a strong money lender can be extremely beneficial. Most hard money lenders process the loans within seven to 14 days, and some can go even faster. Knowing how long the process takes is essential in order to be able to freely prospect for new business.
To go further, speed is a necessity even after the loan is closed. If the lender is late in repaying the rehabilitation or construction funds, the project is delayed, the costs of ownership add up and the bottom line decreases. Time is money in this business; taking too long to approve and fund a project costs everyone involved.
4. What are the costs involved?
Understanding the contract and the paperwork can be one of the most difficult and time-consuming parts of real estate investing. Unless you have a background in law or finance, this can also be the least fun step. However, if you try to take shortcuts, you are more likely to find yourself overwhelmed. So be disciplined about understanding the fees.
Still, the fees vary widely. Never sign a contract that you haven’t read in full and also insist on transparency. Be on the lookout for hard money lending companies that don’t offer a transparent process and a detailed term sheet. They might be trying to force you into a bad deal with teaser rates. Insisting on transparency ensures that you understand the terms of the agreement before signing on the dotted line.
5. Where does their money come from?
It may seem like a pointless question, but when you think about it, it is essential to the way they do business. Hard money lenders tend to fall into a few different compartments: they mainly lend their own money and keep the loans on their balance sheet, they sell all of their loans to institutional buyers, or they outsource the funds.
While there may be pros and cons to all of these options, a lender with their own capital plays a crucial role in their ability to act quickly and flexibly because no one is looking over their shoulders with the money. final approval.
Additionally, as we’ve seen during COVID-19 and any period of market volatility in recent history, reliability in times of uncertainty is valuable. Lenders who rely on Wall Street institutions or raise capital for each loan will quickly pull the plug and suspend lending as their cash runs out, but balance sheet lenders can and will continue to lend on their terms. own risk tolerance and understanding of local markets.
With these questions under your belt, you will be ready to seek help from the right hard money lender. All you have to do is find the right property!
Victoria Kennedy is CEO of Atman Real Estate. Connect with her by email.