Is this typical for Hard Money Lender?

Question

After looking at two local (Chicagoland) hard money lender applications, I noticed that the lenders wanted me to disclose as much information as a conventional lender would require.  In addition, the applications included an authorization from me for the lender to go after my assets in the event of a default.   This really did not make any sense to me, since based on my understanding, an HML lender would be more inclined to look at at a collateral more so vs. looking at a borrower.

Please note, my credit score is over 800 so I'm not asking this question because I plan on defaulting.  And I do realize that the hard money lenders incur substantial risks with their funds when they lend to rehab investors, therefore they charge much higher upfront fees and loan interest rates.  But it does not make sense for me to risk my personal property and finances with an HML if I can have the same risk with a conventional loan instead for a much lower fee.

Are HML's typically wanting terms that would allow them to go after the borrower's assets in case of a default?

David Beard · Answer

Personal guaranties are typically requested by hard money lenders.  Remember, if you can get the same financing through a bank, by all means DO SO, it will be much cheaper.  The reason that people use hard money lenders:

• Fast closing (as little as a week).  This makes your offer more attractive than if you're backing it with a bank pre-approval, as you can offer to close in 20-30 days.
• Distressed properties are OK.  Banks will not lend on properties that are not habitable and have an entire checklist of items that will render the property ineligible for financing.  And of course the distressed properties are what you will typically be looking for as a rehabber.
• Finance 90-100% of the purchase and rehab, increasing ROI through greater leverage, and/or enabling multiple deals at once.  Having multiple deals in your pipeline is the only way to make significant bucks (if you want a profit check every month, and deals take 6 months on average from closing-to-closing, then you need 6 in the pipeline).  Very few banks will do rehab loans these days (but by all means call all the smaller banks and credit unions in your area to see if you can find one.)

Jeff S. · Answer

Many request a personal guarantee because they can.  Personally, I don’t think they’re worth the paper they’re printed on.  Some believe a guarantee motivates you to complete an otherwise tough job and not walk away, but this is also why many HML’s require a large down payment.

Some HML’s take investor money and must show that they are taking all precautions with these funds.  Whether the guarantee is worth anything or not, they want to show they did their best to protect their investors and this is one more box they can check.

You’re not paying the high rates and points as a trade-off for not signing a personal guarantee. In theory, you’re paying these because of the risks involved in loaning on what’s typically a run-down, dilapidated, unsalable, property.  In reality of course, with institutional lenders out of this market, demand for this money outstrips supply, which drives its price up.  And, don’t be naïve enough to think that the demand for flip-able properties is not currently huge.

None of this is to say a personal guarantee is a requirement.  There are no hard rules (other than I suppose, to repay your loan!!).  After you’ve developed a good relationship with a lender there is no limit on what you could or should ask for.  Don’t be shy.

It’s a competitive business and there is a lot of money out there.  If you don’t like the demands of one lender, or are uncomfortable, go to the next.  Also, don’t judge by a website or application.  It’s important to meet potential lenders in person and get to know one another.

Jeff

Don Konipol · Answer

There are no set guidelines for private loans or hard money loans.  I consider these loans to be loans that are available when conventional financing is not, or under terms not available for conventional loans.

There may be some, not all private /hard money lenders that satisfy your needs. I always ask for personal guarantees; I sometimes will do a loan without a personal guarantee.  But the reason must be good.  I personally do not consider non personal guarantee as a trade off for higher loan fees or interest rate.  However, I know some lenders do.

Tom Gunnison · Answer

I'd add that you need a successful track record along with a HML relationship in order to get close to 100% financing. We don't do 100%, but I know shops in town that do -- and they price their capital accordingly.

Curt Davis · Answer

It is normal for a hard money lender to want all the same info like a normal lender but it should not be set up for them to come after you in the event of a default, that is why they charge the hard money rates.  When I borrow private or hard money I always get 100% of what I need, never any out of pocket funds, thats why I agree to pay them a good rate.  You will find these problems with companies who advertise private or hard money.  You need a personal relationship to make it easier.  Good luck.

Account Closed · Answer

Vladimir,

If you are putting very little in the deal HML want to have protection. If you put in 30% you should not have a problem. The HML is taking a chance you should take a chance by putting up colleratal.

Joe Gore

Is this typical for Hard Money Lender?

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