1. How to choose the right hard money lender for your deals 1st step
One of the biggest questions out there lately is how do I choose the right hard money lender? Find a company that specializes in making hard money loans. There are many out there that are jack of all trades (hard money, fha, conventional, commercial), not saying that it’s a bad thing, but don’t you want to work with someone who ONLY does hard money? Chances are the jack of all trades is a broker (again not a bad thing) but working directly with a hard money lender (that is a direct lender) will make it a much smoother process.
2. Be careful of the bait and switch
Be wary when you speak with multiple lenders and they are all in the same range for rates and loan to value based on your credit/experience, and then you find one that is so much outside the norm of the industry (much higher loan to value, like 90% for 1st time investors) or 1%+ lower on rates than the rest of the industry. These lenders like to bring you in the door with the promise that they have what you’re looking for, cheaper money and less out of pocket to get your deal done, but we have all heard about these horror stories in the end! Be it the rate at closing, not what you were promised from day 1, bringing more to the deal than you originally expected, or even worse, when it’s time to get a draw and there are no funds to draw! This last issue is common mostly with private lenders (not hard money) where the lender has a finite amount of money to lend, they overextend themselves, and then leave you hanging when it comes time to get reimbursed for your draw. This is a very stick subject when knowing how to choose the right hard money lender and a topic of debate in the industry.
3. Look for reviews and ask for referrals.
See what others are saying about the hard money lender you’re thinking about working with. How was their experience? Was the lender on time with their closing date or did the process drag on (remember you’re paying that higher rate for speed, there is no reason a lender should take a month to close on a fix and flip!) Getting reviews of other real estate investors experience with the lender your looking at should be paramount when deciding how to choose the right hard money lender.
4. Know the right questions to vet the different lenders.
So many borrowers call and ask “what’s your rate” or “how fast can you close”. While those are valid questions, they can and usually are different depending on your deal. You ask how? What’s your rate – it’s an open ended question. Is this a rehab? Turnkey rental? 1 year stabilized bridge loan? Ground up construction loan? What kind of experience do you have? All of those factor into giving an answer to “what’s your rate”! How fast can you close? Again, every loan is different, as is every borrower. One of the main things that can slow down a closing time is the borrower themselves. When a lender sends you a list of ALL required documents to close your loan, but you pick and choose which ones to send back, and the lender needs to request those documents over and over, this slows down the process. Typically for a borrower that sends in a complete file from day 1, and pays for a rush appraisal, there is no reason a rehab loan cant close in 7-8 days, and if its a regular appraisal 14 days. Our suggestion is that when you’re calling lenders to vet them, ask more specific questions after letting the lender know what it is you’re looking for… hi this is John Smith, im looking for a rehab loan in (pick your city), what documentation would you need from me to get this process started. Or.. Hi this is John Smith, I’m looking for a rehab loan in (pick your city) and I have completed 3 fix and flips in the last 3 years, what rate would I qualify for.
5. Communication from day 1.
This one is HUGE. If you contact a lender and it takes them days to get back to you, that is just a sign of what is to come down the road during your hard money loan process, that is if you choose to go with them. I’m sure many of you reading this have experienced the following scenario, you find a lender that has what they tell you are market beating rates and higher loan to value ratios than the others you have spoken to, so you decide to move forward. You gather all your loan documents and send them in, never to hear from that lender again, or it takes them days to get back to you. This leads us into #5
6. Watch out for common red flags in the hard money loan industry!
Some of the most common ones are – asking for money upfront (due diligence fee paid to lender, while this is common on larger commercial deals, it is NOT on 1-4 unit residential ones). The only thing you should be paying out of pocket are for the appraisal, and that should be paid to the appraisal company directly. There is ABSOLUTELY no reason a real lender would need 0, 00, 00 or more to review your loan documents prior to closing. Another one to watch out for is when a lender asks you to wire your down payment to them directly. This is a HUGE red flag and you should RUN and RUN quickly. Last but not least, our old friend, the 100% funding lender. What this type of “lender” does is promise you they will fund your whole deal, nothing out of pocket from you. We all know, at least those of us that have been in the industry for a long time, these lenders are all bait and switch. They get you in the door, promise to fund 100% of the deal and then something goes wrong and they come back to you with, “Well the appraisal wasn’t good or came in low and you will need money in the deal to close”. Typical bait and switch!!