Am I a hard money lender? Yup. Does that make me biased? Yup. But perhaps for different reasons than you might think.
As I mentioned before I have worked in the real estate game for some time now. I’ve worn many hats and have a deep love and respect for my fellow investors. One thing I’ve learned in all these years is having access to consistent funds is key to building your business. You know this of course, that’s why you are reading this.
So seriously, why does this matter? Because I’ve been there before. I think too often my fellow hard money lenders forgot what it’s like to need funding. Heck, I still have to use a financial partner to get funding for some of my projects -- well it’s my lady -- but you know what I mean ;)
Obviously making sure you are partnered with the right hard money lender is crucial in getting your real estate deals funded. Not only are you looking to get the best terms, which is important to your bottom line, but just as important is making sure your deal is structured right and can get closed in a timely manner.
It is my goal to share with you as someone who lends, but also someone who is in the real estate game, what you should be looking out for. I want to help you avoid the pitfalls that might plague your next investment opportunity by sharing with you 5 tips for picking the right hard money lender.
Without further ado, here we go.
Tip #1: Work With Direct Lenders
There are many advantages of working with a hard money lender compared to traditional banks. Perhaps your credit score isn’t perfect. Maybe you’re financially over-leveraged. You may not have proof of income. And a whole host of other reasons why working with a hard money lender makes sense.
But, you want to make sure that you are working with a direct lender. Why? Because if you are working with an intermediary lender, AKA broker, then there is one extra layer you have to deal with.
In fact, sometimes working with a hard money broker can be just as difficult as working with a bank or credit union. Brokers can sometimes collect far too much documentation and information that is unnecessary. This is done as they are shot-gunning the borrower's file to multiple direct lenders, who all have different guidelines. Meanwhile you are paying hefty rates and going through the ringer.
On the contrary, a direct lender uses their own capital and are able to make decisions much quicker. Usually the underwriting requirements are much less and focused primarily on the value of the property versus the credit-worthiness of the borrower.
You generally pay less points and interests with a direct lending partner. With a broker, there is that added layer and they are obviously looking to get paid, which bumps up the cost of doing business.
I personally believe in working directly with the source. Much less headaches and more efficient.
Tip #2: Choose a Lender That’s Local
Yes I know, we live in a digitally connected world. So many people are remote these days and technology has empowered us to never have to meet in person. Don’t get me wrong, I love that we can do business virtually and use zoom and the internet to do the majority of the work.
But when it comes to real estate, there is a distinct advantage in having your lender in your local area. I might be old fashioned in this way, but understanding the area is vitally important to making quicker informed decisions.
Not only evaluating property values quicker, but also, having an awareness of how the market operates in specific areas and being able to react.
After all, we are partners in this real estate venture. Wouldn’t it be to your advantage to have someone in your backyard who understands your market? Instead of a large national chain that might be out of touch with your area.
Tip #3: Make Sure The Hard Money Lender Is Reputable
This is a no-brainer, but sometimes if you are running short on time to close a deal, you might end up not doing your due diligence.
I highly recommend searching the AAPL member directory to confirm if the lender is legit. Of course not all lenders are listed, but it’s definitely a good first step.
Do a search on the phone number and address that’s listed on the lender’s site. I would also recommend making sure the address and phone number matches on their website and any marketing materials that they’re using, such as email or business card.
Along the same line, do a search on the owners. See what comes up. To narrow the search on common names (e.g. John Smith) try and include the city or the name of the company to help make the search more relevant.
Go to the state’s entity search website and confirm their entity is active. I would venture to say this is a public record in all states, assuming they are operating as a corporation or LLC. If they are not, then that should be a concern.
And don’t be afraid to ask your lender for references, specifically past borrowers they can talk to. I totally understand that not all transactions are going to end perfectly. There are going to be those hiccups. And that’s totally acceptable. You are just trying to see if there’s a pattern to be aware of, such as bait and switch, unethical dealings, etc.
Tip #4: Understand What Affects Rates and Terms
Ah, the nitty gritty. There are several factors that have an impact on your rates and terms.
And please keep in mind, as a financial partner in your deal, we are always considering the risk. Naturally, we are looking to minimize and protect ourselves from loss. This in turn is actually a benefit to you, the investor, by having you consider factors of the deal that could be overlooked and end up costing you.
When hard money lenders decide how much interest and points to charge on a loan, the primary consideration is the equity in the property.
Besides equity, lenders also consider the following factors, which has can impact your rate and terms:
What is your real estate investing experience and track record?
How much are you able to put down?
How much rehab does the property need?
What kind of neighborhood is it in?
How long do you need the loan for?
What is your exit strategy (e.g. fix and flip)
As you can see, there are a number of loans you might need from a hard money lender.
Here are the most common hard money loans and each have their own set of considerations that affect rates and terms:
Fix and flip
Cash out loan
Cash out refinance
Tip #5: How Fast Can They Close
One major advantage of working with a hard money lender is being able to process and close deals quicker than traditional lenders. And of course any lender worth their salt will do everything in their power to expedite things.
But I would be remiss if I didn’t mention a few things to keep in mind:
Remember, lenders do not control the closing process 100% and meeting timelines falls on how quickly appraisals can happen, how quickly title can work, how quickly the borrower submits the required documents to the lender, liens being cleared, etc. If any lender states they can close in 24-48, they are not taking into account all the other parties involved in the transaction. All the puzzle pieces need to fit together before a loan is ready to close.
A quick closing can only happen if everyone can work quickly together. However, we can usually do 7-10 days realistically under ideal conditions.
Bonus - Red Flags:
I thought I would conclude by sharing some red flags. Not all of these are obvious, but something you should keep an eye out for. You can thank me later.
Lenders using a gmail/yahoo/aol, etc. email address -- that should send off some red flags. A real lender should invest in a business domain. Not only is it more professional, but it also requires registering for the domain name, which is another layer of transparency.
Asking for a loan application fee is a red flag, or any sort of payment upfront to process the loan is a warning. The lender should only be collecting fees when the loan has closed, and those fees are paid through closing at the title company.
If a lender says they don’t need to use a title company, red flag. ALL transactions involving real estate should be going through a reputable title company.
One last red flag warning. Be wary of lenders that comp properties in-house versus utilizing a third party appraiser. In my opinion, those lenders that comp in-house will always undervalue the property so the lender protects themselves even more. If they undervalue it, the loan amounts are smaller, which means the borrower most likely needs to come out of pocket a little more to cover the cost of the purchase and complete the rehab. Utilizing a third party appraiser might cost the borrower extra money, but it ensures all parties are getting an unbiased opinion of the property value and the borrower is receiving the maximum loan to value.
So there you have it -- 5 Tips For Picking The Right Hard Money Lender. I hope you found this article helpful and informative.
Not only do I want to help you learn more about hard money loans and how it can be a valuable tool in your investing arsenal, but I also want to help protect our industry.
There are always a few bad apples in every market -- ours is no exception. But I can tell you that there are also honest and hard working lenders who want to show value and be an integral part of your business.
We would love to hear from you so you can ask us questions recommended in this article.
We are not shy and are all about building long-term relationships. In fact we built Black Label Capital on being a true lending partner based on Saving You Time, Working Efficiently and Being Transparent.
Isn’t it time Hard Money became Easy Money?
Let's chat today. I look forward to learning more about your funding needs.