To Be A Successful Borrower, You Must Think Like A Lender

Lenders put various guidelines in place when underwriting loans. Many believe it is because they want to make borrowers jump through hoops, create difficulty for investors to get loans or to make the “rehabber cream” rise to the top. The truth of the matter is that lenders have rules and criteria in place for one reason and one reason only. We don’t want to lose money! Lenders aren’t making money unless it is lent out and the majority of lenders have more money than deal flow so, saying ‘no’ can be difficult. Remember, we are in the lending business and do not want to take back a house. I say, “If you see me rehabbing a house, it is only by accident.”

The only way to keep from losing money is to make sure the borrower is making a good decision in the deal he or she is doing. Lenders like the odds to be good and the borrower should as well.

Getting caught up in the emotion of a deal is easy. ‘Potential profit’ is a term people use too loosely, assuming it is a reality in a good market cycle. In the movie, The Big Short, lenders believed that potential profit was reality (worth the watch if you haven’t seen it). Stick to the facts because that is what successful, tried and true lenders do. Investment is a numbers game for those who know the market.

As lenders, we set a formula that we are comfortable with so that when we have to take the house back, we can sell it quickly. Should investor/rehabbers work outside that formula? No! Risk should always be minimal if you want to make consistent returns on your investments. We care about the days on market and so should investors. If the days on market for comps on an appraisal are over 3 months, lenders don’t want to do the deal.

Lenders make money on lending money. The more payments someone makes, the more interest we earn. Payments are always welcomed by the lender, but for the borrower, every payment made is a loss of profit. Hard money is a short-term loan because most lenders make more money off the points than interest while keeping the rehabber on their toes so they finish the house quickly. I prefer repeat borrowers because they are keeping more profit and will do more loans.

If I were an investor/rehabber, I would make sure every deal I was involved in met the criteria of a respected, successful hard money or private lender. If the lender thinks it is a deal, then the borrower must have a low risk deal.