What do you look for when working with a Hard Money Lender?

Question

I've looked at the bigger pockets guide on working with hard money lenders but wanted to see what you all might specifically look for when choosing to work with certain lenders. What questions do you ask and what makes you choose one over another?

Mike Klarman · Answer

Civic started writing bad paper and thought if they were forced to sit on it, which they were, that they'd be ok.  That obviously was not true.

These lenders out here that do the billions and I do not want to mention them here but there's like five that do most of the business, most small lenders are brokers for one of these 5.  Yes, there are a few true PM outfits and. few personally wealthy individuals that lend their own money, but for the most part your deal is being funded by one of the big 5.

A few have very high standards and try to write A paper at all times, Civic started loosening up guidelines, reducing credit limits, not vetting cash reserves.  They started writing a heap of terrible loans, given the spotty decline of real estate across the many markets in the US didn't help and they found themselves out of money.

The bridge loans with rehab are the toughest lines to get placed right now.  A turnkey purchase is easy even if you are new.  If you have the credit and the cash, a lender will fund you on a turnkey no problem.  But to secure a purchase with rehab right now - Lenders want to see more experience, more credit, and more cash than ever before.   Lenders used to count turnkey holds as experience and now they do not.  The only thing that counts as experience now is an exit from a short term loan.  A sale or a refi, that's it.  Holding does not count right now at a few of the big boys.  So lots of investors who are 5+ because they have a few holds that are 5 years old, well guess what?  You're a 0 for experience now on your next loan.  Crazy.

This hazy, fog over the short term status of the interest rates and the housing markets across the US are making lenders pucker up tighter than every before.  Hopefully things change for the better, they will eventually, but hopefully soon.

Michael Kinsella · Answer

I like @Mike Klarman's suggestion above about working with a responsive lender.

Below are some questions you might ask;

Experience

• How many comparable deals do I need to have completed?
• Do you offer a lower cost of capital/increased leverage for investors with more experience?

Cost

• What is your typical interest rate?
• How many points do you typically charge?
• What additional fees do you charge?
• Do you charge interest on the full loan amount, or just funded amounts?
• Do you charge a prepayment penalty?

Term/Leverage

• What is your typical term length?
• What is your typical LTC (loan-to-cost)?
• What is your typical LTV (loan-to-value)?

John O'Leary · Answer

When shopping for a hard money lender, there are several factors to consider that can impact the success of your investment.  With everything going on in the news regarding our banking system, stability is extremely important. Civic who was backed by Pac West is a perfect example. Civic was closing around $3 billion annually, and will most likely not be around in 30-60 days. Other factors to consider are as follows.

• Cost of capital: Hard money loans typically come with higher interest rates and fees than traditional loans, so it's important to compare multiple lenders to find the most competitive rates. A lower cost of capital means less money out of your pocket and more profit potential for your investment.
• Speed: One of the key advantages of hard money loans is their speed. Hard money lenders can often provide funding in a matter of days, compared to the weeks or months it can take to secure traditional financing. When time is of the essence, a fast funding turnaround can make all the difference in closing a deal.
• Reputation: The reputation of your lender can impact the success of your investment. Look for a lender with a proven track record of successful real estate investments and lending. Check reviews and testimonials from other investors who have worked with the lender to ensure they have a good reputation in the industry.
• Flexibility: Hard money lenders can offer more flexibility than traditional lenders when it comes to loan terms, repayment schedules, and other factors. This can be particularly important for investors who need customized financing options that meet their specific needs.
• Ability to underwrite your loan up front: A reputable hard money lender will evaluate your project and determine if it's a good fit for their lending criteria before approving the loan. This upfront underwriting can save you time and money by identifying potential issues and ensuring that the loan is a good investment for both you and the lender.

Caroline Gerardo · Answer

I would not choose one based on advertising here.

Recent closed deals similar to yours. Rate, fees, time frame to close, reserves, and what the require are the first questions. Second are they willing to be a long term partner, what referral sources do they have in the city where subject is located (contractor/handyman/CPA...). Third do they answer the phone and do what they say. They generally will not give you references.

Mike Klarman · Answer

Look for responsiveness.  Attentiveness.  Someone who is reachable.

The products are what they are.  Most small white label lenders are brokers with relationships at the bigger lenders.  So, if you’re paying exorbitant amount of fees and points, it’s not the lender.  It’s the broker soaking you with his/her points and fees.

Some brokers are worth every penny and others aren’t worth a single penny.  Your money guy should have his finger on the pulse of the market.  He should also have a Rolodex of vendors you can draw from: contractors, insurance agents, title contacts.  Brokers like that are so worth their point.

It’s the lazy, greedy brokers out there that want to offer no guidance, no connections, never available and then they want to charge you two points on top of the lenders point.  They give brokers a bad name.

Eliott Elias · Answer

I look for,

Interest rate

Points

LTC/LTV

Ease of money

Do they require appraisals & inspections

Draw fees