Working with Hard Money Lenders [16 Tips]
Originally posted on https://fasterfundslending.com/working-with-hard-money-lenders-16-tips/
Working with Hard Money Lenders Can Open the Vault to Your Real Estate Investing
You have been thinking about getting into real estate investing business for a long time and you’ve finally decided to act. There are so many hard money lenders out there. Who knew finding financing for your real estate investing business can be so intimidating? Here are the top tricks and tips when it comes to determining which one is the right one for you and your real estate investing business needs and developing a relationship with a hard money lender.
So, what tips do I need for selecting a hard money lender? Hard money lenders are not created equal. Make sure the lender values win-win situations and shares your business values and vision. Ask a lot of good questions to dig deeper into their business model and how they approach lending. Make sure you fully understand their values and terms and know that they fit into your business model.
I work for a local hard money lender, FasterFunds Lending in St. Louis, MO and it is my goal to debunk all the mysteries behind the real differences in lenders and how you can find the best fit for yourself and your business. You’ll receive the tips and tools you need to know which hard money lender is the best fit for you.
Top 16 Hard Money Lending Tips and Questions:
- How long have you been in the hard money lending business?
- What will happened if my rehab takes longer than expected?
- How often does the hard money lender deny loans and why?
- Does the hard money lender service their own loans in house? Do they sell their loans?
- Is your hard money lender an active real estate investor?
- Does your hard money lender underwrite their clients?
- What are tips to building a positive relationship with a hard money lender?
- Does your hard money lender run out of funds to lend?
- Does your hard money lender feel comfortable doing multiple loans at once with their clientele?
- Is your hard money lender local? If they have a team, is their team local?
- Does your hard money lender charge for an outside appraisal or do they do the appraisal internally?
- What fees are typical for the hard money lender to charge outside of their regular annualized interest rate and origination fees?
- Do you have a minimum or maximum loan amount?
- Once pre-approved, how quickly can the hard money lender close the loan?
- Does the hard money lender only lend on single family residences (SFRs) or will they consider 2-4 families or even 5+ units?
- How many loans does the hard money lender do with new borrowers versus repeat borrowers?
Hard money lending is a competitive field without much regulation. Due to the lack of regulation, there is typically a large difference between each lender and it’s important for you to educate yourself so that you make the best decision for you. It’s important to ask these questions.
1. How long have you been in the hard money lending business?
Hard money lending is currently a trendy business to get into which leads to many inexperienced people getting into the business. If an odd situation comes up, you want someone who understands how to handle it and has resources to help you mitigate any risks for your business.
Hard money lenders who have been around for a while have encountered a wide variety of scenarios and will have experience handling the situation professionally and with ease. Experience is a great teacher. Experience will often make the lender easier to work with. They have a very refined business model and know exactly how to communicate their business philosophy.
2. What will happen if my rehab takes longer than expected?
Landlords and flippers have all encountered a surprise or two once their renovations start making headway. There are often surprises in house systems like electrical, plumbing or even structural surprises. There could be hidden mold or maybe a contractor quits and your stranded with a half-finished project and every other contractor is booked 1 to 2 months out.
Unexpected situations are going to happen, and you want to make sure that the hard money lender has the option to extend and won’t call your note or foreclose. If they do offer an extension period it’s important to ask how long they can extend and what are the terms. Many times, hard money lenders will use this tough situation to increase or double the interest rate, charge an additional origination fee or points and make money on your unfortunate situation.
3. How often does the hard money lender deny loans and why?
I know this may seem like an odd question. But it’s an important question to ask because many hard money lenders do not care if you as an investor make money as long as the hard money lender gets paid.
Smart hard money lenders value win-win situations where they will commit to a profitable loan with you. In return they are a second set of eyes for you on the house, making sure you’ll be successful and have a high likelihood of turning a profit.
Smart hard money lenders deny loans where it’s a risky project and save their borrowers from losing money on a deal. If they have a lot of real estate experience, then they will often have a good intuition on if it’s a solid real estate investment. Their knowledge can save you a lot of money and business risk in the long term if they keep you from purchasing properties where you would take a loss.
4. Does the hard money lender service their own loans in house? Do they sell their loans?
Sometimes hard money lenders are smaller and do not have the resources to service their loans in house. This could mean selling the loan or hiring an outside servicing company. This can be tough on the consumer because you are no longer working with the original company.
What if the new company’s values, or business philosophy doesn’t align with yours? Also, they might not be local or understand your real estate market. If you need to extend your loan and you do not have a relationship with the servicing company/ new owner of your loan, are they going to be willing to do the extension?
If you’re sitting here reading this wondering what we mean by selling a loan, let us use an example. When you get a conventional loan on your house, you’ll typically work with a local mortgage broker. Oftentimes after you’ve closed, you’ll get a notice saying your loan has been sold to a certain company who will now take over the servicing of the loan. Now, you’ll be responsible for paying this company your payments.
This is common practice in the consumer space and many smaller hard money lenders run a similar model to this. This isn’t much of a problem/ concern in the conventional loan space since those loans are fixed and are between 15-30 years.
However, since hard money loans are so short (typically 6-9 months) when issues come up, it’s much more difficult to talk through the situation and look for a win-win option since the company that bought your original note is likely a large hedge fund that is looking for a large return for their investors. Hedge funds tend to be less client focused and are more profits driven.
5. Is your hard money lender an active real estate investor?
As an investor, have you ever thought to ask you real estate agent if they are a real estate investor and if they understand investing? That is a great question that helps set you up for success in your business relationship.
It is the same for your hard money lender. Have they flipped houses? How recently? Does your hard money lender have rental properties currently? Do they understand being a landlord? The real estate market is constantly changing and it’s important for your lender to be up to date. For your hard money lender to give you good advice on real estate deals and to truly be a business partner in your growth, it helps if they are an active investor and understand the current market.
6. Does your hard money lender underwrite their clients?
Many hard money lenders advertise that they do no underwriting for the borrowers. They may also say there is no borrower screening. At first glance this may seem like a great deal. There are no hoops to jump through and you’ve got a hard money loan really fast based solely on the property.
There are a couple problems with this if you dig deeper though. If they’ll lend to anyone, they are taking on additional risk. If a loan doesn’t perform and the borrower can’t make their payments then the house gets foreclosed on and the borrower loses all their money, time and materials that they have in the project. This can be devastating for a borrower. Furthermore, the foreclosure process is expensive. You have legal fees, court costs and sometimes the process can get pretty drug out and become even more expensive.
The hard money lender still must make money so they’re passing these additional costs on to their customer base. This means that their borrowers and clientele will have higher rates, more fees or more origination points. There is always a cost to riskier loans.
Finally, if they’re not underwriting the borrower, this shows they don’t value you the win-win situation. They will lend on the property if it’s a great deal but if you as the borrower doesn’t have the funds to make payments or you’re not bankable and cannot refinance out with a bank, then you are likely not going to succeed on that project.
When our team talks about win-win situations, we want to see that you have the financial means to comfortably make payments, your exit strategy is solid and that you have the experience/ means to take on the project you are wanting a loan on. FasterFunds Lending isn’t in the business of taking back homes which is why we emphasize borrower underwriting.
7. What are tips to building a positive relationship with a hard money lender?
It is important to remember that your hard money lender is a business partner and the relationship should be managed like a professional one. Hard money lenders and their team pay attention to how you present your self and your business. Make sure you get the relationship off on a good foot by presenting yourself as organized by getting all your documents into the lender quickly and in an orderly fashion.
Lenders like clients who treat them with respect and understand that it takes time to underwrite borrowers. Good lenders will set expectations with their clients about the timeline for the underwriting process. If you constantly email or call them, this will slow down your application and limit their ability to focus on their work. This also shines a negative light on the potential borrower.
Lenders also want to see that you have experience and that you have taken the time to learn about hard money and really researched your real estate investment deal. What renovations are needed? How much will those renovations cost? What is the contractors time line? Did you build in budget overages in case of contingencies? It’s important to know your stuff, act professionally, treat the lender like your business partner and respect the lenders process and timeline.
Show your hard money lender that you are prepared for unknowns. Show that you have an emergency fund to help with rehab overages, unexpected issues that come up and that you have several exit strategies if your first one does not work out.
8. Does your hard money lender run out of funds to lend?
Currently the real estate market is trendy and booming. When there are a lot of investors active in the market, lenders are often completing a lot of loans. At times, lenders businesses can get overwhelmed and if they are getting more loan requests than they have the finances to handle sometimes they can run out of funding.
This can put a damper on your business growth and your ability to execute on deals. Lenders who are more experienced and have a team are usually better able to handle more business and less frequently run out of money or have issues servicing their clients. Keep this in mind when you are asking a potential hard money lender questions and vetting them as a business partner.
9. Does your hard money lender feel comfortable doing multiple loans at once with their clientele?
Every hard money lender has their own policies, procedures and comfort levels with their lending program. When an investor is brand new to real estate investing many hard money lenders will want to do one loan and see how it goes. If you make your payments on time and make the hard money lender’s job easier by being organized with any and all paperwork, then they’ll likely feel comfortable moving forward with a plan for you to scale.
Lenders will approve more loans and do more business with real estate investors that they like and who treat them with professionalism and respect. It’s important to know that everything in real estate is a relationship business and if you can build a strong relationship with your hard money lender and show them that you are a serious real estate investor then they would love to support you in your business goals and dreams.
10. Is your hard money lender local? If they have a team, is their team local?
If your hard money lender is local, this can come with other business benefits. If they’re local, this means they will know the local real estate market. They may also have connections to wholesalers, real estate agents, contractors, etc. to help you build up your team. Your lender may be able to connect you with other rehabbers and landlords to grow your network of like-minded people.
Asking if the lender has a team is the second step. If they have a team of people that means they treat their hard money lending business like a business and not just a part time job. If they have a team and they treat it as a full-time business, that means their sole job is to focus on growing or maintaining their loan portfolio and their relationships with their borrowers.
If their team is local, ask if they share an office space and how their team works together. That way when you call into the office, you’ll know which team member you need to speak too. Some people also value meeting face to face to see who is making the decisions, who they talk to about servicing questions, etc. so it might be nice to put names and faces to roles within the hard money lending business.
11. Does your hard money lender charge for an outside appraisal or do they do the appraisal internally?
When asking about the appraisal, this will tell you two things. One, what additional cost, if any do I need to budget for and two, how helpful will the appraisal be. When a lender charges for an outside appraisal, you’ll have an additional fee to pay for that and you never know how accurate it is since. Most appraisers do not know your plan for rehabbing the space. The appraiser also isn’t looking at what is or is not in your budget. They are unwilling to give you advise on your project and what tips and tricks will help you make the most money on your investment.
If your lender does an internal appraisal like FasterFunds Lending, they will walk the property with you, may or may not charge you for their time (FasterFunds Lending does it as a service for free) and will help you look at your scope of work for the rehab. This is where you as the borrower can take advantage of the lender’s experience and ask them their opinion on certain rehab ideas, see if you’ve missed anything in your budget that they see and get their opinion on where your After Repair Value (ARV) will be based on what work you do.
12. What fees are typical for the hard money lender to charge outside of their regular annualized interest rate and origination fees?
Hard money lenders have the availability to add a lot of fees outside of their interest rate and their origination fee. It is important to ask about their interest rate and origination fee so you have that when calculating your numbers to see if a deal makes sense but all of the fees can make a big difference in your costs as well.
Ask them exactly what their late fees are, fees that are charged on the settlement statement when you close a deal and what fees are charged when the loan closes. Note, these fees can change over time so ask for an updated fee sheet with your lender once or twice a year.
Typical fees you’ll see outside of the interest and origination fee are: service fee, loan documentation fee, wire fee, flood certificate fee, loan underwriting fee and appraisal fee.
13. Do you have a minimum or maximum loan amount?
This is very important if you’re looking at doing smaller loans or larger loans. If you’re looking at houses that are worth $50,000 or less, it is very important to ask what their minimum loan amount is because many lenders do not find it is worth doing loans under $50,000 or there’s not enough of a retail market to show the value there for them to be excited to do the loan.
If you’re looking for loans above $250,000, many hard money lenders do not want to put that much capital down on one loan. But if you are a rehabber looking to do higher dollar homes, it is important to cover that with your hard money lender and see what they would be comfortable with.
14. Once pre-approved, how quickly can the hard money lender close the loan?
There is a difference between the timeline to get pre-approved if the lender is doing borrower underwriting and the timeline to underwrite a specific property once it is under contract. It is important to know the timeline on both of these things so that you know how quickly your lender can close once you get a house under contract.
Sometimes wholesalers will give you preference if you can close on the same day they close but if they need you to close in 4 days, you need to know if your lender can make that timeline before you make a commitment.
The one important thing to note is no lender is going to be able to close you if title work is not done! Always make sure you’re checking in with your title company about what closing date they think is realistic and when title work will be available.
15. Does the hard money lender only lend on single family residences (SFRs) or will they consider 2-4 families or even 5+ units?
If you are looking to buy multiple units / multi-families, it’s important to ask if that’s in your lender’s wheelhouse. Many lenders just lend on single family residences and do not lend on multi-families due to your exit strategy being limited. Your only real exit strategy is renting it out and refinancing.
If you are excited about multi-families, talk to both your hard money lender about it but also get pre-approved with a long term, local lender for properties of this size. This will help ease some of the concerns your hard money lender may have and show you’re prepared.
16. How many loans does the hard money lender do with new borrowers versus repeat borrowers?
At first, this may seem like an odd question to ask and you might be wondering why is this important. What this question tells you is how many people like going back to that lender multiple times. If the hard money lender has mainly new business, there’s probably some questions you need to dig into around that.
Is it because they just started their business? Or maybe they just acquired a lot of money that they are trying to lend right away but have no experience. Maybe they have poor customer service and their clients go elsewhere after their first loan experience. It’s always good to dig deeper and find out the why behind their business.
In conclusion, hard money can be the catalyst that elevates your business to the next level. These tips and tricks on hard money lending are designed to help you better understand the industry and to help you find the right lender for your business.