NOT ALL HARD MONEY LENDERS ARE ALIKE! That is the first thing to remember when starting to shop for a lender. That’s right; you have to shop for a lender just like you shop for the right house. Some lenders may seem a little cheaper on the front side of a deal, i.e. 1% less in rate or 1 less origination point. That small savings may wind up costing you $10,000, $15,000, or more on the back end! What happens if you take a loan for 6 months and the project is not complete and sold at that time? Will your lender give you an extension, or will you be forced to “quick sell” the house, realizing thousands less in profit than you had anticipated? What happens if you run into an unexpected issue with the rehab? Will your lender work with you to come up with a solution, or will they just say, “We made a deal to lend you a certain amount, for a specific scope of work, and it’s your problem, not ours.” Will your lender release draw funds only to you, or will they release funds directly to the contractor? Who determines that work is completed according to the draw schedule, and is indeed complete before funds are released?
I want you to ask these questions because I have heard every horror story in the business, and I don’t want these things to happen to you! A true Hard Money lender is a partner, not an adversary and a deal is only profitable if everyone wins. Does your loan have a PPP (Pre-payment Penalty)? If you’re borrowing money short term, and paying points up front, why would you pay points to pay off the loan?
When talking with a HML, make sure you understand all aspects of the loan. What is the term? Can you get an extension? What is the cost of the extension? What is the interest rate? Is the loan an "Interest Only" loan, or will you be paying back interest AND principal, making the payment more expensive? When are draw payments made, and to whom, and who determines that the work is completed?
If you ask the right questions up front, it can save you a lot of problems later AND make your deal profitable, instead of breakeven, or worse. There’s a lot of money to be made flipping houses, but not asking the right questions or wrong decisions up front, can hurt you badly during, or long after the rehab is complete.
Excellent post and very accurate. Sometimes the "bait" of a lender is all sizzle and no steak. The true meat of the loan is left hidden and unfortunately can blast the borrower in the end. Interest rate and points is something any lender can make attractive, but the penalties, junk fees, and lack of working with the borrower as problems come up can burry the deal. Another note I would like to add is the available funds of the lender. Are they DIRECT and will they run out on you. The relationship needs to be built, and if the Lender can't keep up with you and their other borrowers than what good is the relationship going forward?
Thank you Chase. You are absolutely correct and there is a big difference between a true Hard Money Lender and a Private Lender. Most Private Lenders are using their own funds and their capital is limited, so they may not be there for you when you need them. Nobody wants to have to shop for money on every deal. It is important to try and build a relationship with a well capitalized, direct Hard Money Lender, and you will always have money available when you need it!
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