Hard Money Lender Expectations as a Newer Investor

Like shopping for cell phones, finding the right Hard Money Lender (HML) can be quite perplexing. With all details in hand, there still never seems to be a true apples to apples comparison on which plan is "better". It's not just simply lining up the monthly costs side by side to decide. There are several other factors that could weigh into the final verdict: phone coverage, internet speed, phone purchase specials, coolest commercials, etc.… Then, after you go through the entire purchasing and set up process, you end up with something that costs you more than what you were promised in the ad, begging the question, did I pick the right company? Good old buyer's remorse.

Shopping for a Hard Money Lender is no different. The marketing and initial conversation says one thing, then your end loan result feels vastly dissimilar. The reason of course is because the rate and terms being marketed are specific to experienced investors and are well out of reach for newer investors entering the space. Let’s clarify, our industry typically defines being an “experienced borrower” as having at least 3 flips in a 24-month period. If you have less experience, you are classified as “new” and will miss out on the banner rate and term offerings. Regardless of your recent training and/or work done for a partner (for which you were not listed as an owner in the company), as a real estate agent, or even as a general contractor, you will still be labeled “new”. Occasionally, HMLs will allow a high credit score or strong liquidity to help offset lack of experience. This may only help you on the leverage or “loan amount” but will still yield higher rates.

  1. Details will make you not break you. Fill out the application and treat it like it’s a college final! If you tuck away details around the project, financial situation, credit, experience, etc., these will inevitably come back around later in the process and may provide for an initial quote that does not meet your expectations. Any quote you get from a lender who asks you less than 6 questions, be cautious. They are not doing you or your project justice. Sometimes you may end up as a pipeline filler who ends up taking a much worse loan due to time wasted and your desperation to close. Details, details, details!
  2. If a lender tells you it doesn’t seem to be a sound deal… it’s not. Use them as a check and balance. If you feel like you have to force/fudge data to make it sound good to a lender, then your project may not be profitable.
  3. Take your medicine. It takes more than just a single “spoonful of sugar” to help the medicine go down. We all must start somewhere and must prove our ability to operate in the space. If you have a lender willing to give you 85% loan to cost for the purchase and rehab the property at 11% or less with 2.5pts origination points: take it and run. While these numbers seem higher than what the market dictates in some areas, I can assure you, once you get to closing as a new investor, these are typical terms in many markets. Now, there are a handful of lenders who offer lower rates, but again, be mindful there is something within that loan to offset the lower rate such as increased points, lower leverage, draw process dictation, as-is caps, and so on..
  4. Try to refrain from “shopping” after your first deal. The process is much like dating; the first one is always the most difficult. I’m not saying take them to prom — just out for at least one more cup of coffee. If you are working with someone you respect/like but didn’t quite get the terms you wanted, stick it out for a couple transactions regardless of other offers you might get. The second deal is always easier once you learn each other’s pulses. If you get through 2 or 3 deals fully with one lender, you are now in more of a driver seat around loan expectations which means you get to pick the movie!
If you have a lender willing to give you 85% of cost to purchase and rehab the property at 11% or less at 2.5pts: take it and run.

Hard money is a bit softer than what is perceived. Meaning, lenders worth dealing with won’t just focus on the property and ignore the experience and financial strength of their borrowers. Don’t waste precious time under contract and/or miss the chance to go under contract trying to find something you may not qualify for based on your experience. Get into those first deals and get them done so you then your qualifications yield the favorable terms you’ve been chasing.

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