Why would hard money lenders trust someone they don't know?

[Sam Lewis]

I understand the benefits behind hard money lending, its guarenteed return from your cash... however, what cases would a hard money lender trust someone they don't know/barely know? I'm getting to a point where I might want to pursue a lender for future investments but am trying to understand how these lenders choose people to work with.

[Zane Cress]

You should check out one of the featured lenders from BP. They will analyze your deal and if needed look at your past deals to determine if you are a stable borrower. You will still have to bring 15-30% down depending on the deal risk and your personal risk to them. You might be able to find a local lender near you and meet them in person as well. 

[Chris Seveney]

Quote from @Sam Lewis:

I understand the benefits behind hard money lending, its guarenteed return from your cash... however, what cases would a hard money lender trust someone they don't know/barely know? I'm getting to a point where I might want to pursue a lender for future investments but am trying to understand how these lenders choose people to work with.

 We do some private lending and we do not trust the borrower. This is why you need to do a ton of due diligence on them and make sure they have skin and the game and something to lose. When you get a personal guarantee and lend to someone who has assets etc. - they have a lot to lose. Seeing people give others money for down payment assistance etc. to me is just plain dumb. They have nothing to lose, its like giving someone a free ticket to the football game, if they go great if they do not who cares they just do not go and there is no consequences for them. 

[Tanner Lewis]

You are likely blending PMLs with HMLs here, most PMLs lend on a relationship basis and most HMLs underwrite the credit profile and risk of a deal. 

The find a lender tool is a great tool to find hard money and DSCR lenders!

[Erik Estrada]

Most HMLs follow a trust but verify. And their loan documents will definitely work in their benefit if they foreclose on a property... But yes it is risky, and that's why you pay a premium for it. 

HMLs are looking mostly at the deal itself, not really the borrower. They do conduct a background check, credit check, will check cash reserves, and will make sure the borrower is using their funds for business purpose only, but there is less emphasis on the borrower and more on the deal itself. 

If the deal makes sense, it is not uncommon for a borrower with sub 500 credit to obtain financing with no appraisal required. 

[Crystal Smith]

Quote from @Sam Lewis:

I understand the benefits behind hard money lending, its guarenteed return from your cash... however, what cases would a hard money lender trust someone they don't know/barely know? I'm getting to a point where I might want to pursue a lender for future investments but am trying to understand how these lenders choose people to work with.

These types of lenders are called "Hard Money" because they are not betting on the borrower.  They are trusting in the potential value of the "Hard" Asset. The borrower's experience is important, but what's more important is the "Hard Asset," Hard money lenders rely on their due diligence process to determine the potential future value, review the renovation plans to get to that value & sometimes even the contractor.  The experience and assets of the borrower are also part of the due diligence review. The more experience and more assets, the cheaper the rate a borrower gets.  Bottom line- As with all lenders, hard, money lenders have a process they follow to approve deals.  With that said I do know a few hard money lenders who operate on the principle that they have to like you to lend you money, but most 

[Andrew Syrios]

Well there's a reason they screen their borrowers, secure their loans with a first position trust deed/mortgage and charge a small fortune to make such a loan.

[Carlos Valencia]

Hello Sam, 

Hard lenders look at the deal and look at your experience on past deals. If you are a new investor they will still will work with you but due to being new you will pay a higher interest rate and more points than an experienced investor. Therefore many people what they do to get around this is partner up with an experience investor to help them get better terms on the hard money and that also helps you gain experience that you can use for when you go solo. Hard money is mostly for flipping properties or using it as a bridge money for a temporary solution if you need more time depending on what type of trouble you get yourself into. Only use hard money as last resort as its intended to be used for short term investments or band aids to get your through. Hope this helps understand better how hard money works. 

@Albert Bui @Matthew Kwan

[Mike Klarman]

So you mean Private Money.  HM comes with a credit/b.g. check so that's why they trust you.  They'll look at any open mortgages you have, any lines of credit, cc history.  

Commercial PML will do the same, they'll have the credit and b.g. inquiry.

You mean a true Private Individual with capital for lending?  I imagine they get their clients by referral, I mean I would'nt want the public applying through some website that's for sure.

[Robin Simon]

Quote from @Sam Lewis:

I understand the benefits behind hard money lending, its guarenteed return from your cash... however, what cases would a hard money lender trust someone they don't know/barely know? I'm getting to a point where I might want to pursue a lender for future investments but am trying to understand how these lenders choose people to work with.

 Its certainly not "guaranteed return" - thats a word to always stay away from in real estate (in finance or even investing in general)

high level - its because HMLs are going to be secured by the real estate, meaning in event of default, the lender can get the property to be made whole - somewhat trust is involved, but thats the main mechanism behind it

[Lucas Thomas]

Hello!

I've dabbled in hard money for a few years on both sides of the transaction and here are the 3 types of people in the business.

Borrower Types:

• The Professional - HM Lender will cut sweet-heart deals to keep these borrowers around
  • Experienced real estate investors
  • Regularly engage in property transactions
  • Typically have a track record of successful projects

• The Newbie - Charge Higher everything as the risk is higher as no experience
  • Novice investors or first-time borrowers
  • Limited experience in real estate
  • Seeking to build their investment portfolio

• The Deadbeat - Only lend if the deal is so SWEET, they can't lose if they take the property from the Borrower
  • Borrowers with poor credit history or financial difficulties
  • High-risk borrowers
  • May struggle to secure traditional financing

The lender will do an application on the deal/borrower and some standard docs they require are:

• Hard Money Application / Experience
• Purchase contract
• ARV report – COMPS – See * Redfin*
• Pictures of Property – most people use Dropbox to share
• Proof of Funds – Down / Reserves (Bank Statements)
• Personal identification (ID or passport)
  

But usually if the deal is sweet enough, they will do it anyway because if the deal goes south, there is so much equity/value in the property that the HM lender can't lose.
Hopefully this helps.

L.Thomas