Thoughts and experiences using a hard money loan for flips?

Question

Looking into getting into my first flip using hard money, any tips are greatly appreciated!

Eliott Elias · Answer

Do not plan on holding the loan more than 6 months, it is important to know the following.

- Draw process

- Max LTC loan given

- Are appraisals & inspections needed?

- How quick can they close?

- Loan extension options?

George Ansong · Answer

All the responses are great. My recommendation is find a mentor (flipper) in your area and work with them on a couple of deals to get used to the process even if you have to pay the mentor some of your profit. Some Private Lenders (Hard Money Lenders) do not even want to lend to first time flippers and if they do they charge a much higher rates. The learning curve for a new flipper is very steep and I believe you need a helping hand!

Obed Calixte · Answer

Understand what documents are needed to qualify for a hard money loan. This can be as simple as having an LLC and EIN to having X months of bank statements to show funds are seasoned. You do not want to wait until you need a hard money to begin gathering the necessary documents.

Understand reserve requirements - how much cash do you need to show proof of access to.

Understand how to read a term sheet - what do the terms mean. Can you calculate the numbers to ensure they are correct

Harrison Busbee · Answer

Hey Sammy!

I invest in Atlanta and we have raised millions of dollars in private capital over the last several years. I would urge you to find private money from friends and family as you can get a better rate. Think about a few things they should be thinking about and you will be in good shape to raise money from them.

• Your experience and track record: Before taking money from someone for a flip, it's important to make sure they know you have have a solid understanding of the industry and a good track record of successful flips. You can show your past projects, share  references,etc.
• 
• The property itself: You'll want to do your due diligence on the property being flipped to make sure it's a good investment. This includes checking the market value, the condition of the property, and any potential issues or repairs needed. You can also consider getting an independent appraisal to get a more objective opinion. Share all of this with your lender.
• 
• The terms of the loan: Make sure you fully understand the terms of the loan, including the interest rate, repayment schedule, and any fees or penalties. It's also a good idea to have a lawyer review the loan agreement to make sure everything is legally sound. If they sense a crack in your knowledge they will not feel comfortable working with you.

I hope these tips help you as you consider getting involved raising private money. Good luck with your investment!

Mike Klarman · Answer

Great tool for an investor looking for the value add projects because you get the money to fix it up.

Things that can go awry:

Your contractor is bad and the job is a nightmare

You don't have your first in money to even get the job started - yes - the downpayment to the contractor to start is on you.  So if you budget is 80k let's say and he wants 20% to get going that 16k you gotta come out of pocket and then wait to recoup that until end of the project.

The market you are in downturns when you're completed

Your loan is ready to balloon out and you've still not sold this thing and you can't afford the refi because you must come out of pocket a little more cash.

Aaron Schrader · Answer

I recently heard a friend who builds spec homes say "if the house is empty, that means work is not being done, so never have the house empty".  They use different loans similar to hard money that have holding costs, so that advice is very applicable to your situation!  Don't let the house be empty, which means your scheduling of contractors and deliveries should be tight.

Eugene Neal · Answer

There are a couple of good suggestions listed above. I would also say it's important to see current funded deals as well as be able to reach someone consistently on the phone. Our clients are normally not one time transactions. So understanding our clients goals and success points are equal as important to ours. Our goal is always to deploy properly risked capital constantly.

Jarrod Covey · Answer

Top 3 things to ask

1. How long does your draw process take? (i.e. some people will save a point on the rate, but they will sit in the loan twice as long because the draw takes a week versus two to three days.)

2. Are you qualifying me or the asset? (i.e. is the lender qualifying you as a borrower, or the property as an asset) Asset based lenders require much less than borrower based to get into the loan, saving you time and money

3. Can you refinance me out of existing loan? Ideally the lender has capability to refinance you instead of you having to speak with another lender and go through the paperwork collection process again

Chris Seveney · Answer

I think it's really important to do your due diligence and fully understand the terms and conditions of a hard money loan before jumping in. As you know, the interest rates can be high, and there may be additional fees and costs to consider as well.

That being said, hard money loans can be a great option for those who are just getting started or who don't have a lot of capital to work with. It can be a way to leverage other people's money and potentially earn a higher return on your investment.

Ultimately, it comes down to your own personal goals, risk tolerance, and financial situation.

Thoughts and experiences using a hard money loan for flips?

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