How to Evaluate and Compare Hard Money Lenders

As someone who has personally borrowed from over 15 different hard money lenders and talked to a hundred more, I can tell you that it's not always about rates and terms, and that there is no perfect hard money lender (HML).  It ultimately comes down to who can actually close at the terms they initially give out.  When I talk to a new hard money lender, it's basically a 1-hour interview session, and the topic of interest rate and points only takes up about 5 minutes.

Here are some quick tips when evaluating/comparing HMLs.

Watch Out For Fees

Lenders can charge an application fee, processing fee, underwriting fee, admin fee, service fee, appraisal/BPO fee, rehab financing fee, construction draw fee, etc. Everyone advertises points and rates, but no one talks about fees. I've seen lenders charge as much as $5k on top of points and as low as $0. Add these fees to the points and compare that total cost. This is the same reason you compare APR and not interest rate when it comes to conventional loans. Always look at the HUD statement and confirm that it meets your expectations.

Cover Your Downside

Get the longer terms if possible and understand extension policies. I've had lenders tell me that their extension policies are easy. And when I reached the point that I needed an extension, apparently what "easy" meant was to raise my interest to a default rate of 15% and charging 0.75 pts/month on top of that. That was my worst experience. Good lenders let you extend 3-6 months for each point. I was talking to a lender over the weekend who had a loan that was in default and I asked them, "Do you want me to help your borrower refinance into a one-year loan?" And they said, "No, why would I do that? I'm making good money off them being in default."

I think most investors are very optimistic and don't think they'll need more than 5-6 months. But recognize that you are not always in control of everything. Even outside of contractor issues, what if the market doesn't necessarily crash but just flattens out? Then your property's going to sit. I had one flip that was supposed to take 6-8 months and ended up taking 2.5 years (a story for another day). I had another flip where, right when we listed, a huge sign came up across the street saying, "Tent City is coming to you!" That house sat for a while because no buyers wanted to live across the street from the homeless. Now I always get a 1-yr loan, even for a 2-week cosmetic flip.

Get Pre-Approved First

Some lenders won't want to talk to you until you have a deal in hand, but push for that pre-approval. This really helps you understand their policies (and its surprises) and what kind of loan you can do with them. A lot of lenders advertise 10% (or lower) down payment, but after all the fees or reserves they require you to have, it'll look more like 20%+ down payment. Some lenders only need one person to qualify whereas others require all members of the LLC to qualify. Some lenders will not finance the wholesale fee as part of the acquisition price, which means that if you buy a wholesale where the wholesaler is adding $50k on top of the purchase price, that $50k is coming from you out of pocket.

Understand the Differences Between National and Local Lenders

National ones are usually cheaper, but they often have more restrictions and paperwork (i.e. hassle factor). Local ones can move much faster (mainly because they don't require an appraisal/BPO) and may have much more flexibility, such as cross-collateralization, down payment reserves, allow junior liens, allow secondary financing, higher LTVs, etc. I usually still prefer national ones because I do chase rates and terms and I understand their requirements enough to structure the deals and financing in a certain way, but I always have local ones as a back-up in case they don't close. This is a lot harder when you invest out-of-state; it's a problem I'm currently working on solving.

Beware of Scams

It seems like Nigerian princes are frequenting the real estate world as private and hard money lenders. Some things to watch out for:

• - Gmail (or other free e-mail) addresses. Most reputable HMLs care about branding and have a website and a real e-mail address that is not [email protected].
• - Upfront fees. There is no need to pay for anything outside of the closing, except for a BPO/appraisal (which you often pay directly to the appraisal company, not the lender).
• - Terms that are too good to be true. The best hard money terms for a bridge/rehab loan that I've seen is 7% interest. Be very careful if anyone is offering less than that and do thorough research.
• - Bad English / grammar / typos in their communication. Usually, someone who is client-facing and represents a reputable company has great English and people skills.
• - Facebook groups or Craigslist ads. You tend to find more fake lenders than real lenders in these places.
• - 100% financing. While there are real (but rare) 100% financing lenders out there, just tread very carefully here.

And of course, when in doubt, Google or search for the lender on BiggerPockets and see what comes up.

I hope this was helpful to you on your investing journey.  If you ever want a second opinion on your hard money lender or the terms that you are getting, feel free to reach out to me or to the general BP community.