Worth It To Use Hard Money Lender Starting Out?

[Wayne Terry]

Hello All,

I am looking to start investing relatively soon. I've done tons of research on investing via books, blogs and websites like biggerpockets. Now that that I know how I want to invest, the next question is where am I going to get the money and with what credit? Hard money lenders here in Atlanta has been the only option I have run across so far, but the terms are kind of tough 15% interest and a hefty down payment. Also no owner-occupy. I understand thats something I might to live with. Is this a good idea starting out? My goal is buy rental property and quick flips. Thanks!

[Ann Bellamy]

Here are some ways to decide on using a hard money lender:

1. First, most are unlikely to give you much time until you have a deal under contract. But you can still call for general information. Be sure to ask about upfront fees and back end fees. Some hard money lenders have fees built into the deal that you pay for when you pay off the loan, but which you won't know about until you are at the closing table. A bad practice, but it certainly exists with some companies. So if you know to ask about them, you are better prepared.

2. Google them for references, and go to your local reia and ask around about them. You want to ask about a. do they ever pull out at the last minute, b. do they change the terms after they have committed to the deal c. Do they suddenly add fees they haven't told you about (other than normal closing and attorney fees)

3. You should also understand that because you are new, you don't know what you don't know. So many things that are normal every day business practices to them, are not known to you. So you may feel that they are adding changes you didn't expect, when in fact, it's simply your inexperience with normal closing processes.

4. Use lenders local to you. They have a knowledge of your market that the national lenders don't have, and are more likely to know your property and neighborhood when you call them. Which means a yes is more likely to stay a yes.

Something else which impacts the rate and terms you get: For a hard money lender, newbie investors are much much riskier than experienced investors. The newbies tend to under compensate for contingencies, under renovate or over renovate, make bad color choices, take too long, have contractor issues, want to do it all themselves, manage contractors poorly, and on and on. Therefore the risk of having to take back a project that is either unfinished or won't sell, is much higher.

As a result, some lenders simply won't lend to beginners. So put that on your list of questions to ask.