What to say to hard money lenders on your first real estate deal.

Question

I am looking to start a relationship with a Hard Money Lender to do fix & flips in my city. I have only purchased my current home. I have never done a real estate investment deal before.

I am planning to sit down with a Hard Money Lender this weekend.

1.) What should I bring?

2.) What do I need to know?

3.) What kinds of things can help me to be more likely to get a loan?

4.)What kinds of things could hurt me?

Thank you so much!

Anything helps!

-Jake

Ryan Blake · Answer

@Jake Evans There are a ton of questions to ask but most imporantly, they should be providing full and complete answers to you. You need to feel like they can be trusted. That is the most important.

What is your investor success rate?

This is important to know but can be lied about very easily. Many don’t track this statistic. I don’t know if it is because they don’t really care or just haven’t thought of it. I think it is probably the most important stat. Look for groups who offer referrals to local contractors, Realtors, etc. Also, look for groups that have boots on the ground in each market that know the specifics of investing in that area.

How many loans have you closed in this month?

Any good HML will know this number off the top of their head. You want a lender that is busy. If they are closing a lot of loans, they probably have something good to offer. Ask about how many loans they have closed in your area. A good number will vary based on the current market and the size of your metro area. Know that many lenders will say they are nationwide but as far as I have seen, no single HML lends in all 50 states.

What is your maximum LTV?

This is a two part answer. Like the company I work with will finance 100% of the purchase and repair but to a maximum of 70% of the ARV. Meaning that if the ARV is $100k we will finance all of the purchase and repairs assuming they are not more than $70k. Another common funding is 90% finance with a maximum LTV of 70%. Using the same example from above they will finance up to $70k if they purchase and repairs are $77k or more. As you can see, this means your out of pocket will be $7k more.

Do you require an appraisal and survey?

Most HMLs will require these. I am wary of the ones that don’t require an appraisal. What that says to me is that they don’t care if the property is good or not because they will just come after you if the deal is a flop. Small-time HMLs may not require an appraisal but this could be because they will drive out and view the property themselves. Survey is a toss-up on whether or not it will be required. The company I work for does require it.

Is there a pre-payment penalty?

Some will require you to pay the interest through the term or another length no matter how long you hold the loan. Just make sure that you include this requirement in your costs. Most lenders that have pre-payment penalties only have it at 3 months or less. It is pretty rare to buy, fix, and flip to a new retail buyer in less than 3 months. Just don’t use this kind of loan for bridge funding. Also ask if there are any fees for the hard money loan at all at closing when you sell/refinance at the end of the loan.

Do you have relationships with refinance lenders?

Make sure that they have a good relationship with a company that will refinance the loan for you if you are using a BRRRR method. You want to see something that has low or no seasoning for a cash out refi.

What is your draw fee & benchmarks for the repairs portion of the borrowed money?

Know what your fees will be to take out the repair money borrowed. Draws are almost always held back until you reach certain points in the project. They will also charge you to have an inspection by a 3rd party to make sure the work is done. I have seen this range from as low as $100 up to $300.

Do I need to pay anything before sitting at the closing table?

There have been numerous people on BP talking about how they paid application fees but they could never get their loans closed on any deal brought to the company. This is a practice by some less than reputable companies. One I saw charged $500 upfront to be pre-approved and would never actually fund any loans. Just beware. Most reputable HMLs will not charge anything until you are sitting at the closing table and all fees will be listed on the HUD-1 closing document.

And of course, what are the points, interest, and attorney/document/admin fees for the loan?

This will vary based on region but in general 2 – 5 points, 11% - 14% APR (meaning this is the annual rate so divide it by 12 to get the monthly interest amount), and documents fees can be from $200 – $1,500. The document fees are what will vary wildly from company to company. Just know them going in so that you can properly budget. You will also want to find out if payments are interest only or if some principal is built in. Most hard money will be interest only payments on the full approved balance of the loan whether or not if you have pull the draw funds for repairs.

If you have any other questions, post them below so that we can all learn from the answers.

Alexander Flores · Answer

@Jake Evans

My first deal was with a HML and I hadn't done a deal before but I was knowledgeable since I was researching REI for over half a year before I even though about dipping my toes in the water. I was honest with them and showed that I was eager to learn. If they asked me something I did not know, I researched it right away and returned their calls/messages ASAP.

Also the deal had a lot of room for error. My debt to income was 10%, I had a full time job and lived at home. They knew if I didn't pay or abandoned the deal, that they could still make money on it.

At the end of the day it is a numbers game. HML are not in the business of flipping homes or doing what you're doing, they are in the business of lending. It is a calculated risk for them and you need to make sure the rewards outweigh the risks.

Bring your financials, financials of the property, comps on the property, your multiple exit strategies. They will probably ask you what if scenarios on the deal.

Jake Evans · Answer

Good to know Alexander. I appreciate you response. I am still in the stage of determining what a "good deal" is on a property to buy, but once I decide on my parameters, the next step will be for me to sit down with a HML. Thanks again for your response.