Hard-Money Lenders Are Not Alike: How I Lost A $1M+ Deal

Some experiences are educational, others are costly. This one was both.

Some time ago I received a call from a wholesaler friend who had an amazing opportunity. It was a cute bungalow on a massive lot. The neighborhood is transforming rapidly from a group of cottage-style 700-900 sf houses to 3-4k sf high-end homes. Property values for new construction was running over $300 per sf due to the prime location in town.

We had done smaller projects before and went to a 'reputable' hard-money lender (HML) we had worked with on some previous flips. The initial reaction to my plans was lukewarm. However, as the design was coming together and our Broker was getting excited about the possibilities, so did the HML. In fact, we started receiving spreadsheets from him demonstrating the ARV was real. About 2 weeks from closing, we were still limited on cash and the latest spreadsheet showed a gap in equity of about $50k, so we approached a friend who spotted us a short term loan to cover the gap as presented.

All was looking so good! Paid $20,000 for an extension to facilitate plans to designer, ordered a survey, closing getting closer. Then the most shocking thing showed up in my email!

The gist of the email was that all looked good...and we need an ADDITIONAL $56k at closing!!! WHAT!? For weeks we were being told what we understood was correct.

We gathered up our broker and met with the HML and Management. During the discussion, the HML Manager actually admitted they made a mistake. A MISTAKE!? That mistake cost me almost $30k in direct costs (extensions, surveys, etc.) and almost $200k in lost opportunity! Unable to raise that much cash in 5 days, we lost the option and deal.

When confronted with the need for the HML to compensate for their mistake, the written response was, and I paraphrase, “Pound Sand!”

These were people with whom we had previously had successful project completions. Yet, when the shoe dropped and they were culpable, they tried to sic their attorney on us.

So the short story is Beware! Get everything from a HML prior to closing in writing, even, and perhaps especially, if you have done business successfully in the past.