What should investors compare besides rate when choosing a fix-and-flip lender?

Question

I see a lot of investors comparing financing almost entirely based on the interest rate, but the lowest rate does not always result in the lowest total cost or the best execution.

For a fix-and-flip loan, I think investors should also compare:

• How much of the purchase price is actually financed
• Whether the full rehab budget is included
• Cash required at closing
• Monthly interest payments or interest reserve
• Origination and lender fees
• Draw reimbursement process
• Extension options and costs
• Prepayment penalties
• Whether the lender can realistically meet the closing date

A quote can look attractive until the investor realizes they need significantly more cash at closing, must front the renovation costs, or the leverage changes after the appraisal and experience review.

For the investors here who have used private or hard-money financing: what mattered most after the loan actually closed and what do you wish you had asked before accepting the quote?

For context, I work with real estate investors on fix-and-flip, DSCR, bridge, and ground-up financing, so I’m also interested in hearing what borrowers value most from their lender.

Nick Belsky · Answer

@Raymond Duplessis

Interestingly enough, very few clients I work with care much about the rate for bridge or new construction loans, within reason.  If you are comparing two identical quotes with one at 9% and the other at 13% for a $500k loan... then yes, that is variable.  Rate should never be the primary focus for hard money unless you have a wide gap in offers or plan to be in the loan for a longer period... then carrying costs can add up to quite a bit.  Even with DSCR, rates are far more important, but still not the most important element to consider... the tenant is paying the interest after all, not the borrower.

As many others have pointed, there are far more critical items to consider.  I have actually seen a lender or two have a prepay on a bridge loan.  They are no more than 6 months of interest, but they are still out there although very rare.  Those particular lenders also provide loans to certain scenarios that the general lending pool would not touch... so there's a reason the have a prepay.  A few even charge an exit fee as well...

Over the last year and a half, there has been much more focus on draw processes.  Admittedly, prior to, I paid little attention to this with my lenders.  Now it is one of the most highlighted features I provide on quotes to clients.  I was appalled what I was hearing from some then current client and past clients about how lenders were actually performing on the draw process.  One of my former go to lenders has by the far the worst, most cumbersome process I've ever heard of.  We rarely do business with them these days but if we do, we give the client a full rundown of what to expect.  It works for some, not so much for others, so we find another option.

Lenders executing hasn't been much of an issue for fix and flip and new construction.  I know my capital well enough and as long as no surprises show up with he borrowers and property, we can get them done.  DSCR is a different story, but we are in a market backswing on those right now and uw constraints are ridiculous right now.  Several lenders I work with have paused DSCR programs all together for now to focus on bridge options.  Eventually, it will swing back to favorable but who knows when...

Interesting times for sure.

Cheers!

Erik Estrada · Answer

I think the most important out of fees, rate, and terms, is the actual ability to close and performing on your quoted terms.

Private money lending is the Wild West. There is no regulations, no recourse, and no one to really point the finger to if something goes wrong. You are putting your EMD, your reputation as an investor, and your time on the line if you work with a bad lender. There are many bad lenders, and very few trustworthy ones. Once you find a trustworthy lender, make sure they are your best friend.

Mike Klarman · Answer

Lenders are very inconsistent.  I closed bridge and DSCR with dozens of lenders.  Not everything goes the same way all the time.  Some loans are problem free, some have nothing but problems.

As far as Lenders go: Clarity, Accessibility, Speed.  I really think pricing is secondary for those three.  You want clear communication, be able to reach someone if need be, and get things closed in a timely manner.  Whether the pricing is one point or two or 9.99% or 11.99%.  Without clarity, accessibility, and speed it will be a nightmare.

Some people are good at what they do and some people are on autopilot cause they checked out.

After witnessing 40+ projects from the frontlines, it is really about the sourcing.  Any project I saw bought on market or from national wholesaler, a flip didn't work.  Especially with the wholesale houses.  They do not have flip inventory, maybe BRRRR and leave money in if you're lucky.

I know now having access to cash buys for discounts is how you guarantee your money back at refi.

I bought a duplex at Auction for 23k in May.  I sold it for 42,500 immediately to a local investor once I had title.  But if I started that project from 23k, be in for a total of 100k after the rehab.  The ARV is 170k.  That's about 120k back in a refi.  Each side will rent for 1300 and the mortgage payment would be less than 1 unit.

If I had a crew that I knew could knock out the rehab no problem, it's a no brainer.  Since I'm still trying to find my like minded tradesmen there, I sold it off for a quick 20k.

But I'll be able to build a cash flowing portfolio with low priced assets because of the price I'm able to get in at.

Surviving the bridge loan is way more about the asset and the team than it is the lending.

Robin Simon · Answer

Prepay and Exit Fees on a hard money are crazy - gotta be careful out there!

Jesus Suarez · Answer

I would add to that list  Dutch Interest vs. Interest on Drawn Capital. Paying monthly interest on the full $100k rehab holdback from Day 1—versus only paying interest on funds as they are drawn down—adds up to thousands in extra holding costs on a 6-month project.

Robin Simon · Answer

Interesting list - I'm trying to learn more about what borrowers look for on hard money (fix and flip financing), its definitely a different set of priorities for DSCR or perm financing for sure.

You have prepayment penalties on your list - I was under the impression these were pretty much never applied to fix and flip loans - are there some lenders that have prepay penalties on these loans out there?  If so, what does it typically look like?

Raymond Duplessis · Answer

Good catch. On most fix-and-flip loans, you typically won’t see a traditional prepayment penalty like you might on a DSCR or other long-term rental loan.

What some lenders may have instead is a minimum-interest requirement, an exit fee, or language requiring a certain amount of interest even if the loan is paid off quickly. So “early payoff terms” would have been more accurate wording than “prepayment penalty” in my original post.

Either way, it’s worth confirming upfront, especially for an investor expecting a fast renovation and resale. What are you finding borrowers prioritize most on fix-and-flip loans leverage, speed, draw process, or overall cost?

Stacy Raskin · Answer

I think also how likely an investor can trust that this mortgage broker or lender will do what the mortgage professional says she or he is going to do. If the investor has worked with the mortgage professional before then there's first hand experience. If not, doing research on the mortgage professional and/or getting recommendations is important because DSCR and fix and flip lending are business purpose loans and the loans are not regulated the same way as owner occupy conventional loans. DSCR and fix and flip loan rates and terms can legally be changed all the way up to closing with no financial penalty to the mortgage professional. This is different compared to conventional owner occupy loans which have to stick to what was disclosed at the beginning of the loan process for certain aspects of the loan or the mortgage professional faces penalties.

Some people who work in mortgages will say whatever sounds good to get an investor to start working on the DSCR or fix and flip loan and then once the investor has invested time and/or paid for the appraisal, terms might change. So besides actually getting the loan funded, trusting the mortgage professional to do what was discussed is very important.

Christian Wamsley · Answer

Raymond — great list.

From the broker side, the thing I’d add is that investors should compare certainty of execution, not just pricing.

A quote can look great on paper, but the real questions are:

Can the lender actually close on the timeline?Will the leverage hold after appraisal and experience review?How much cash does the borrower truly need to bring?How fast are draws actually reimbursed?Who answers the phone when something goes sideways?

For fix-and-flip loans, the draw process is one of the biggest things investors underestimate. If a borrower has to front too much rehab cost or wait too long to get reimbursed, that “cheaper” loan can create cash-flow problems fast.

I also think borrowers should ask early:“What could cause these terms to change?”

That one question usually uncovers a lot — appraisal risk, liquidity requirements, experience adjustments, insurance issues, title concerns, or seasoning.

After the loan closes, most investors don’t remember who was 0.25% cheaper. They remember who communicated clearly, funded on time, and helped them keep the project moving.

What should investors compare besides rate when choosing a fix-and-flip lender?

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