“Can you get it done?” The question a nervous borrower asks as they get closer to their closing deadline without a lender in tow. The problem is they had a lender yesterday but today the lender changed their mind. Oh, and it is only a week before closing. Sound crazy? Because we close on time, every time, this problem is something we routinely run into.
If hard money is in your arsenal of funding tools, then you will want to have a hard money lender you can count on. Having good hard money lenders can be an essential element of your success as a real estate investor. Here are 8 tips for selecting the right hard money lender for your investing business.
Find A Lender That Specializes In Hard Money
It is a good idea to select a hard money lender that specializes in it. As the hard money industry has matured, we have seen most lenders that lend money as a hobby, or a part time job, disappear. Almost all hard money lenders these days specialize in it, but it is still great to understand this. The reason this is so important is you want someone that knows the industry and is focused on clients. We recently received a call that there was a problem with one of our releases and our lien remained on a property even though the loan was paid off in full several years ago. It turns out that the title company never recorded the release, and we were able to rectify it in less than an hour. This could have become a much larger issue if we could not resolve it quickly because this specific client was in the middle of a refinance.
What Is The Source Of The Money
This might be the most important question you ask any private money lender or hard money lender. Many hard money lenders are small companies loaning out their own money and maybe the money of some close friends. In those cases, this becomes even more important. If the money is coming from the IRA of an investor, there could be delays with closing. Some IRA administrators take longer than expected and I have heard many times of the funding coming after closing. This can create tremendous stress because if you don’t hit your closing deadline, the seller does not need to close at all. Another concern would be if the money is coming from a different funding source, like a bank loan or line of credit. The reason this can be concerning is they have specific guidelines that can, and do, change. If you are approved for your loan with your hard money lender and the guidelines change on their line of credit, they may be forced to deny your loan. I hope that does not happen when you are expecting them to come through for you.
Finally, there are two different types of hard money lenders. Direct lenders and brokers. Without exception it is better to work with a direct lender. Direct lenders have in house underwriting meaning they make the decision on funding your loan or not. That is super important because you need to know you can believe in and count on what your lender is telling you. Banks are notorious for this, but it is possible that a broker will tell you that you are approved only to find out they don’t make the decision. Of course, you only find this out when they later tell you the deal died in underwriting. It might sound obvious, but brokers need to make money too. They charge fees so what ever the true source of money charge is, the broker adds to that. If you have a relationship with and work directly with a direct hard money lender, you will cut all of those fees out of the deal.
Understanding The Draw Process
We have closed several deals for real estate investors because their other hard money lender was not releasing money for their construction. If the draws do not come quickly and when expected, it will slow a project down. And that is if you are lucky. If you are not getting draws and not paying contractors, they may walk off your job. Finding a contractor to finish what someone else started is much harder than you might believe and will almost always cost you more money. The flow of cash is absolutely essential for profitable deals.
I know there are many hard money lenders that promise additional funding for construction, but they don’t actually set that money aside. When their borrower requests a draw, the lender fumbles and tries to put the money together. Its common and a terrible way to operate and is something that investors need to look out for.
Assuming you are dealing with a legitimate hard money lender that will move money into a separate account for your benefit, you need to understand how their process works. How many draws can you request, how much does each draw cost, what is required to qualify for the draw and so on. If you can find a lender that will advance some construction money before you start, it will help with ordering materials and paying a contractor a deposit.
An easy way to know you are dealing with a legitimate hard money company is to judge their reputation. You can do this with the three “Rs”. Referrals, reviews, and references.
The easiest way to gain confidence in a company is if someone you know and trust can refer you to one. Ask other real estate investors in the market you are working in for referrals to solid lenders. As you work through your diligence on a lender look at their online reviews. What are people saying about them. If they are missing closings, someone will tell you. Google review is a great place to start but you may also want to take a peek at Yelp, Facebook, the BBB and any other sites that allow reviews. As a last step you may consider asking for references. If they will share it call a handful of past or present clients. Asking for the last two or three deals that have closed might be a great way to go because that does not allow them to hand select the best references to give you.
Strive To Work With A Local Lender
Real estate is a local business. Local lenders know the area and can help keep you safe. There are many national lenders, but it is rare for me to hear positive feedback on any of them. Having someone with a representative on the ground helps you get deals closed and will help if you need local expertise.
Obviously, a company that has been in business for a while is more stable than one that recently started. I would want to know that the lender I am counting on can get the deal done. One that has been in the industry and in your market for a while can.
Shopping For Rates
Many real estate investors are focused on loan pricing above anything else. It makes sense that you would want the lowest possible price, but I would just be careful that you are getting the best possible loan. More expensive lenders are that way for a reason. Maybe it is their expertise that they can bring, the speed in which they can work, or the fact that you can just flat count on them. Also, when you are shopping rates be sure to compare apples to apples. There are many hard money lenders that may save you some money, but they require large down payments or have hidden fees. Some things to consider when shopping your lender include: down payment required, total loan to value ratios, income or credit requirements, experience needed, minimum interest due (this is a hidden fee), draw fees, admin fees, prepayment penalties, exit fees, or any other fee that you can think of. Often it really comes down to down payments. The less the down payment the more flexibility you have and potentially the more deals you can take on. It would not be smart to put a ton of money into one deal to save on interest and then pass on other profitable deals. Money in the bank give you security and flexibility that is worth a lot more then a higher rate on a short-term loan.
Look For A Partner In Your Success
This may go without saying but is often overlooked. Most hard money lenders care about closing the deal more then anything else. Even more than you. Hard money is absolutely a fee-based business, so they only get paid when they close loans. When looking for a hard money lender, you want a lender that will tell you no on a deal to protect you. Someone who will do what it takes to help you be successful, even if that means not doing a deal. A lender that is willing to tell you that a hard money loan is not the best solution if it’s not. Because we have been in business for well over a decade, we understand the importance of a relationship. The relationship with our clients is far more important than any one deal. We are successful when we help you with your success!!