6 Things You Need To Know If You’re Looking For A Hard Money Loan
By JD Esajian on April 6, 2018
Access to hard money can completely change your business. Instead of relying solely on traditional lender financing hard money will open doors in your business you didn’t know existed. No longer will you submit an offer and hope for the best. Hard money allows your offer to move to the top of the pile and you will ultimately close more deals.
Finding hard money is more prevalent today than at any time in years past. However, just because money is available doesn’t mean anyone can get it. You need to put your best foot forward and present yourself and your business in the best possible light. Without a plan you may not get the capital you anticipate. If you are looking for a hard money loan here are six important items you need to know.
- Lending is equity based. Every hard money lender is a little different. Lenders tweak their criteria based on personal preference. However, one item that is almost universal is the amount of equity required in the deal. Without a substantial amount of equity most lenders find the deal too risky and will pass. The common equity position is at least 25% with some going as high as 35%. Increased equity provides a comfort zone in the event the value fluctuates, or something happens during the rehab process. Presenting deals with this equity position is difficult but necessary if you want a hard money loan.
- You need a plan. Prior to presenting an offer to a hard money lender you need to have a meeting and sort out the particulars. Like anyone else lending money they need to feel comfortable taking on the risk. It is not enough to show up to a meeting, say you want capital to start flipping houses and walk away with a line of credit. Hard money lenders want to know everything about what you plan on doing with the property, who you will work with and how well you know the numbers. It is a good idea to study and fully understand everything about the rehab process prior to setting up a meeting with a hard money lender.
- Know your turnaround time. The worst thing you can do if you are looking for money is not understand the timeframe. Hard money lenders want to see a return on their investment as quickly as possible. If they have to wait several months for the property to be finished and another handful of months for it to sell they may reconsider. Not only does knowing the turnaround time help in your presentation, it will help save you money. Every day you own the property costs you money. An extra month means and extra payment which lowers your bottom line.
- Minimum loan requirement. There are several key factors that go into a hard money deal. Generating a nice return on investment is important but hard money lenders also look for the deal to be worth their time. The more deals you work on together the more power you will have in where and how you invest. On the first handful of deals it is not uncommon to have a minimum loan requirement in place. It is important to remember that you are usually not the only person they are working with. They don’t want to have several smaller deals that can restrict them from moving on a big one if it comes their way. A small property can make sense to you but may not appeal to them.
- Higher fees, points, etc. There are a handful of dramatic, and obvious, differences between using a traditional lender and using hard money. A hard money lender makes their own set of guidelines and criteria. In recent years there has been some regulation regarding maximum fees and total points. Even as this number has been reduced it is still much higher than what you can expect to pay with your local lender. The reality is that paying the higher fee is still worth the cost. The ability to close more deals and not having to cut corners on the rehab is worth the extra money.
- Case by case basis. Unless you have worked with your hard money lender for years on numerous deals you can expect every deal to be reviewed on a case by case basis. Things change in the real estate market every day. A niche or an area that was appealing just a few months ago may not be the case today. It is important to constantly communicate and meet with your lender to make sure you are both on the same page. By dumping a chunk of your reserves on lead generation in markets that are in decline you could be throwing money away.
Hard money lenders are like any other investor in that they want to see a return on their investment. They always balance risk with potential return. If you are looking for hard money reach out to your real estate agent, attorney or accountant. There are truly more hard money lenders in most areas than at any time in recent years. All it takes is one hard money contact to change the way you make offers and run your business.