Biggest Bang for your Buck: How to Know if Loan Companies are for Real

A lucrative investment method which is quickly rising in popularity is rehabbing, or fixing and flipping, real estate properties. It all seems to good to be true, almost like a fairy tale:

Once upon a time, there was an average Joe. Tired of working at Fast Burgers R Us, he decided to come up with a plan to make mucho dinero. He saw a run-down castle down the street and thought, "Hmm...I wonder if I buy that castle, fix it up and make it look beautiful again, if I could resell it for a massive profit to the King next door." Average Joe didn't have money to buy the castle, but a fairy godmother called a Hard Money Lender appeared in a puff of smoke and offered to lend Joe the money. "But I have poor credit!" said Average Joe. "That doesn't matter," said the fairy, "I lend on the castle's value, not your credit history. Bippity Boppity Boom!" And a large pile of money appeared so that Joe could pay Contractor Dan, Plumber Fred, and all the animals in the forest who came to help fix up the castle. When all was finished, Joe sold the castle to the King next door for a whopping profit and everyone lived happily ever after. 

That's how it works, right? Well, in theory. This is where discernment and doing your homework comes into play. Some hard money lenders will seem too good to be true, mostly because what they claim to offer is a work of fiction. However, there are other hard money lenders who are honest, trustworthy and ready to work with you to help you gain a large profit from your real estate investments. But which is which?

Here's a fool-proof SIX-STEP METHOD to determine whether a hard money loan company is lying or legitimate:

1. Make sure they're LICENSED. Hard money lenders are regulated at the state level via the Department of Real Estate. Therefore, they must possess a valid Real Estate Broker License.

2. WEED OUT the washouts. To cut to the chase and find more reputable loan companies right away, you can either do a google search for hard money lenders in your area or attend a local real estate investor club meeting. This will put you in contact with a network of experienced investors who can recommend a good lender to you. 

3. Research the DAYLIGHTS out of the company. Once you have a list compiled of hard money lenders, become a private investigator: ask for references from clients/borrowers and mortgage brokers and follow up with those references. Find out if any complaints have been filed against the Real Estate Broker License or have been reported to the BBB. Also, find out what industry events the lender attends and ask people at the event about the lender's reputation.

4. DON'T IGNORE the warning signs. Since hard money lenders lend based on the value of a property, it's typical that they won't put as much weight on an individual's personal credit history. However, if a company is willing to lend you money without a background check, is willing to lend on any property, or doesn't have money for a proper website, RUN RUN RUN, as fast as you can. The legitimate lenders will have your best interest in mind, rather than collecting interest from you. You can trust a lender who is not willing to lend money on bad deals: they've got your back and don't want you to waste time or money.

5. DON'T underestimate the industry standard. If a hard money lender is willing to go to extremes from the lending standard to fund your loan, or willing to loan solely on your terms, they're most likely too good to be true. The standard, good deal of a SOLID hard money lender is loaning 65-70% of the ARV. Unfortunately, there's no shortage of scammers who say they can lend on high LTV deals to attract desperate clients. If a company claims they can loan 100% of the LTV, it's more likely than not a work of fiction. Don't believe the hype.

6. Watch out for FINE PRINT or LARGE up-front fees. A scam which is unfortunately running rampant throughout the real estate industry is the "nickel and diming" which occurs throughout the process. False hard money lenders will pad their loans like crazy, charging a myriad of fees NOT INCLUDED in the loan, or asking for a $20K+ fee or down payment up-front. Although earnest money, cash to close and other forms of down payment are essential to rehab deals, the trick is in the VOLUME. Are they asking for a TON of money up-front, for nothing in return? Run fast and hide well.