How To Pick The right Hard money/ Private Lender

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How To Pick The right Hard money/ Private Lender

Rod Coleman
Real Estate Agent · Chester, VA · Member since 2014 · 59 posts · 5 votes

Hello everyone this is a question that has perplexed me while looking for hard money lenders. there are so many in the market to day making it hard to choose from.

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Cameron Sharp
Salt Lake City, UT · Member since 2014 · 35 posts · 18 votes
12y
Ask these questions of each. See below. Make sure you know what you want, resources you have, and exit strategies planned out before hand. - what are your points and interest? - how long are your terms? - do you lend on ARV or current value? - what LTV do you lend? (Most are 65-70% ARV ) - do you cover rehab? - does the LTV include points and interest? - are there any upfront fees? Of yes, stay away in most cases outside of appraisal, docs fees, etc. Lenders who charge to consider your deal or charge an upfront fee usually make their money from charging you. If they say you have to "buy" their program, be cautious. Some will charge am application fee, don't pay more than $100 one time. - what are your penalty fees if the loan goes past term? - ask for references. Some will provide to protect their client, but some will share. Doesn't hurt to ask. - are there any hidden fees? - how much money do I need to put in the deal as down payment or skin in the game? - how do you disburse the rehab funds? - how fast can you close? - how do you determine the ARV? Appraisal, BPO, comps, etc. This should be a good start
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  • Rolanda Eldridge
    Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes
    12y

    Build a relationship with several..They are not all created equal...Good luck!

    1Reply
  • Cameron Sharp
    Salt Lake City, UT · Member since 2014 · 35 posts · 18 votes
    12y
    Ask these questions of each. See below. Make sure you know what you want, resources you have, and exit strategies planned out before hand. - what are your points and interest? - how long are your terms? - do you lend on ARV or current value? - what LTV do you lend? (Most are 65-70% ARV ) - do you cover rehab? - does the LTV include points and interest? - are there any upfront fees? Of yes, stay away in most cases outside of appraisal, docs fees, etc. Lenders who charge to consider your deal or charge an upfront fee usually make their money from charging you. If they say you have to "buy" their program, be cautious. Some will charge am application fee, don't pay more than $100 one time. - what are your penalty fees if the loan goes past term? - ask for references. Some will provide to protect their client, but some will share. Doesn't hurt to ask. - are there any hidden fees? - how much money do I need to put in the deal as down payment or skin in the game? - how do you disburse the rehab funds? - how fast can you close? - how do you determine the ARV? Appraisal, BPO, comps, etc. This should be a good start
    5Reply
  • Cameron Sharp
    Salt Lake City, UT · Member since 2014 · 35 posts · 18 votes
    12y
    Ask these questions of each. See below. Make sure you know what you want, resources you have, and exit strategies planned out before hand. - what are your points and interest? - how long are your terms? - do you lend on ARV or current value? - what LTV do you lend? (Most are 65-70% ARV ) - do you cover rehab? - does the LTV include points and interest? - are there any upfront fees? Of yes, stay away in most cases outside of appraisal, docs fees, etc. Lenders who charge to consider your deal or charge an upfront fee usually make their money from charging you. If they say you have to "buy" their program, be cautious. Some will charge an application fee, don't pay more than $100 one time. - what are your penalty fees if the loan goes past term? - ask for references. Some wont provide to protect their client, but some will share. Doesn't hurt to ask. - are there any hidden fees? - how much money do I need to put in the deal as down payment or skin in the game? - how do you disburse the rehab funds? - how fast can you close? - how do you determine the ARV? Appraisal, BPO, comps, etc. This should be a good start
    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Cameron Sharp

    Very nice list Cameron... And from my perspective any lender that wants a Due Diligence fee you need to be very cautious of.. This Due Diligence fee scam is older than most other scams...

    A true lender will want you to pay for appraisal and credit app.. and or as suggested a small app fee say 100 bucks or so..

    In my HML days I never collected anything up front.. Just charged for appraisal and credit if we closed... I underwrote the file first IE does this borrower have any money,, any credit and any experience, If it was a NO to those then it was a pass and I did not charge them anything.. If it was hey this guy looks good then we moved forward.

    There may be some newbie companies out there doing true equity financing but those with any experience ( like many on this site) that went through the 08 depression.. the days of your great deal and our money are not reality with most lenders Hard money or not.

    Does not do anyone any good to lend to someone who really does not have the capability to pull off a rehab and resale and or as a lender you have to go through their learning curve.. The learning curve in my mind needs to be done with family and friends money.. At least from my perspective and what I am comfortable funding.

    I urge anyone trying to get into the game the best thing they can do is to put some capital together so when you approach a lender you can say Hey I am more than willing to put 5 to 20% of my own money into this deal.. that will mitigage bad credit.. and to some extent lack of experience.

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    4Reply
  • Michael J.
    Rental Property Investor · Louisville, KY · Member since 2008 · 342 posts · 123 votes
    12y

    Good tips!

    0Reply
  • Michael Jobe
    Real Estate Broker · Triangle Area, NC · Member since 2012 · 587 posts · 214 votes
    12y

    Hey @Jay Hinrichs I want to pick your brain just a little since you've been the HML guy plenty of times. I'm just going to throw out a theoretical scenario and you give me your input.

    A newbie rehabber contacts you. He or she had no family or friends willing to lend money to invest and no flips under his or her belt. He or she has a good credit score (say 725+), only $2500-$5000 of his or her own money & looking to get a $100k HML on an $80k property needing $20k in repairs with an ARV of $140k. Based on that (limited) criteria, what do you advise them as the HML?

    0Reply
  • Sebastian Caycedo
    Real Estate Professional · Fort Worth, TX · Member since 2014 · 43 posts · 23 votes
    12y

    Hey Rod,

    Everything Cameron Sharp said is spot on. I myself work with and for a hard money lender (Sherman Bridge) and I agree as far as finding a good one.

    Like everyone said, if any of them charge an "application fee" or the like, I'd move on.

    Be sure to check if buying through your own name or through an LLC changes how much they can lend on.

    Usually they'll go off by your credit and cash reserves, but obviously employment history is important. It is a bit tough if you are a 1099 (Independent contractor), but it is still do-able.

    As far as interest rates, they vary and even if they're high just know that on a flip your main goal is to be and out. I see many people (Including my old self) get too caught up with rates and never end up doing anything.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Michael Jobe

    For me personally I would pass.. I suggest this person bring on an equity partner, or a contractor partner that will do the work for a piece of the action.

    If you look at it from a HML perspective your 100% financing someone. and say you are at 4 points and 12% , and the deal goes pear shaped.. the borrower walks as they have no skin in it and HML can't report to FICO. So there is no motivation to save the 750 Fico they have.

    your money is tied up for 6 months or more.. the house gets vandalized because no one is watching it... And you spend the 4k you made in points on foreclosure cost tax's insurance,, plus lost opp. costs. And if the investor bought the property for 80k its not worth anymore than that as an OREO and probably less.

    The other thing this investor could do is if they worked hard to get the deal tied up they could just bird dog it to someone who has the CCC to do the deal.

    this is my personal view on things these days

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
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    1Reply
  • Wendell De Guzman
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    @Michael Jobe , I would not lend money to your hypothetical borrower for several reasons:

    1. The borrower needs to have more "skin in the game". 10% is what I require or $10K, PLUS....

    2. The borrower needs to pay POINTS. I charge 3-5 points depending on the deal (in this case, that's an additional $3K at least)

    3. I prefer to lend money to those with some experience. The good credit of the borrower is helpful though so I might bend that rule a little bit specially if I can get one of my mortgage brokers qualify the borrower to see if he can do a cash out refi in 6 months.

    0Reply
  • Michael Jobe
    Real Estate Broker · Triangle Area, NC · Member since 2012 · 587 posts · 214 votes
    12y

    Thanks for your responses @Jay Hinrichs & @Wendell De Guzman

    Very enlightening information that I can pass along. I try to encourage my closest friends to venture into real estate investing and the scenario I described has been a reoccurring theme. It's always nice to see it from the guy with the money's perspective.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    12y

    I'm not @Jay Hinrichs but I'll give my perspective. I'd tell the would-be rehabber to accumulate some more cash. The max loan you would get from the HML I work would would be $98K. There would be about $4500 in points and fees on the loan, plus your usually closing costs. The $20K would be held in escrow so you would need about $8500 to close. Then there are going to be monthly payments of about $1250. And you will need to pay your contractors and then get a draw from the rehab escrow. And you will need cash to cover any cost overruns. So you realisitically need about $20K of your own cash on hand to start the deal.

    Many other HMLS are going to require some percentage of your own cash for the purchase and rehab.

    1Reply
  • Kim Book
    Real Estate Investor · Greer, SC · Member since 2014 · 105 posts · 21 votes
    12y

    this information has helped me so much already, I am thinking about placing a bid on a HUD home for flipping and I have interview about 10 differnet Hard money lenders and they are all different,

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Michael Jobe @Wendell De Guzman

    prior to the meltdown that scenario flew all the time I did about 2,000 of them over the years.. the take out was a resale or as Wendell describes a rate and term refi.. now there is some of that rate and term refi back in the market place but I will not EVER again base my loans on that as the exit strategy...

    However I rarely do loans anymore I do all my deals as JV's so I have some control of the asset incase the person goes dark on me I can step right in without having to go through the OREO process and all the time and pain involved with that.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Jon Holdman

    But Jon I think we go to the same barber ! No money down can and does happen but its not the norm, Nor do I think its wise for those with NO real cash reserves to be in the rehab business... It can work and that is great but if it goes bad it causes all sorts of stress on people,, as everyone is different when faced with a stressful situation.. These folks should spend time finding a money partner then doing the deals together to gain experience and have some financial wherewithal to fall back on if there is a hiccup.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    12y

    Rehabbing is a lot like poker. You don't want to be down to the bottom of your stack if you get a good hand and the betting keeps going. Having money on the table is essential.

    Unlike poker, running out of money on a rehab can result in you losing the property and everything you're invested.

    2Reply
  • Michael Jobe
    Real Estate Broker · Triangle Area, NC · Member since 2012 · 587 posts · 214 votes
    12y
    Originally posted by @Jay Hinrichs:
    @Jon Holdman

    But Jon I think we go to the same barber !

    Haha man I nearly fell outta my chair laughing at that one Jay! Thanks for your insight Jon. Between you, Jay, and Wendell I've learned a little more about HML than I knew yesterday!

    Jay what is your criteria when going into a JV with inexperienced investors?

    0Reply
  • Rod Coleman
    OP
    Real Estate Agent · Chester, VA · Member since 2014 · 59 posts · 5 votes
    12y

    Thank you guys for you input, All of you have provided a wealth of information that has taking me some time to take in. @jay hinrichs I'm very interested in learning how to find an equality partner. I have bird doged in the pass but have never been aboe to build a good buyers list

    0Reply
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