Criteria for Hard Money Loan

[Scott Trench]

Hi BP Team - I'm hoping to get some advice from some experienced private lenders or hard money lenders out there. 

I'm trying to define a "Good" Hard Money Loan - both in terms of the borrower, and the underlying deal/project itself. 

I have the following starting hypothesis. Could I get some feedback on this and see if I'm on the right track? 

Anything you'd add or take away? 

“Good Thesis” for Single Hard Money Loan:

Borrower:

• Experience with multiple flips in target market
• But… doesn’t have more than a handful of flips going on at any one time
• Flip is next logical progression:
  • Example: Flipper used to doing SFH in a given market for past several years is doing a slightly larger project, or scaling to do two simultaneously.
• Example: Flipper used to doing SFH in a given market is not progressing from small fix and flips to a $2M luxury quadplex ground-up development in one jump.
• Flipping is the borrower’s full-time job
  • Or, their single side project in an otherwise established career
• Flipper does not have 10 other projects going on
• Borrower has established contractor network
  • Bonus: Has established contractor skillset and license
• Bonus: Has deep experience personally remodeling flips
• Borrower personally guarantees loan:
  • Has material assets and net worth
• Is not highly leveraged
• Has a cash flow positive lifestyle

Deal:

• Close, clear comps support both acquisition and disposition price
• Project timeline and rehab plan is detailed and specific
  • Borrower is willing to loan disbursements staged upon completion of clear project milestones
• Borrower has procured binding quotes from contractors regarding scope of flip
• Loan is no higher than 80% loan-to-cost, and 70-75% of Loan-to-ARV
• Borrower is putting some skin in the game:
  • Borrower’s equity is not just them buying the property at a discount
• Borrower is committing at least 10% (preferably 20%) of project cost in cash from their own personal accumulation
• Timeline is as tight as possible:
  • Cosmetic Flip is less than 3-5 months
• Major Rehab is less than 1 year
• Scrape and Rebuild is less than 18 months
• Longer timelines = more conservative Debt to Equity

[Chris Seveney]

Quote from @Scott Trench:

Hi BP Team - I'm hoping to get some advice from some experienced private lenders or hard money lenders out there. 

I'm trying to define a "Good" Hard Money Loan - both in terms of the borrower, and the underlying deal/project itself. 

I have the following starting hypothesis. Could I get some feedback on this and see if I'm on the right track? 

Anything you'd add or take away? 

“Good Thesis” for Single Hard Money Loan:

Borrower:

• Experience with multiple flips in target market
• But… doesn’t have more than a handful of flips going on at any one time
• Flip is next logical progression:
  • Example: Flipper used to doing SFH in a given market for past several years is doing a slightly larger project, or scaling to do two simultaneously.
• Example: Flipper used to doing SFH in a given market is not progressing from small fix and flips to a $2M luxury quadplex ground-up development in one jump.
• Flipping is the borrower’s full-time job
  • Or, their single side project in an otherwise established career
• Flipper does not have 10 other projects going on
• Borrower has established contractor network
  • Bonus: Has established contractor skillset and license
• Bonus: Has deep experience personally remodeling flips
• Borrower personally guarantees loan:
  • Has material assets and net worth
• Is not highly leveraged
• Has a cash flow positive lifestyle

Deal:

• Close, clear comps support both acquisition and disposition price
• Project timeline and rehab plan is detailed and specific
  • Borrower is willing to loan disbursements staged upon completion of clear project milestones
• Borrower has procured binding quotes from contractors regarding scope of flip
• Loan is no higher than 80% loan-to-cost, and 70-75% of Loan-to-ARV
• Borrower is putting some skin in the game:
  • Borrower’s equity is not just them buying the property at a discount
• Borrower is committing at least 10% (preferably 20%) of project cost in cash from their own personal accumulation
• Timeline is as tight as possible:
  • Cosmetic Flip is less than 3-5 months
• Major Rehab is less than 1 year
• Scrape and Rebuild is less than 18 months
• Longer timelines = more conservative Debt to Equity

Great post as always Scott. So for the borrower, I agree 100%. I have seen borrowers who have done 100 flips and then go into default because they are doing too many at once and their trusted GC craps the bed on them. For us the show stoppers are:
1. Personal Guarantee
2. No more than 75% LTV
3. Prior experience
4. Provide a personal financial statement  (and we pull credit)
5. While this does not need to be their full time job, it goes to "do they have the time for this". 

For the deal itself:
1. Noi skin in the game is a showstopper. Only time we have done 100% is if we can cross collateralize against other assets and those assets must not be levered more than 75%, so we are still levered.
2. Prefer nothing out of ordinary and unique. If you are going to sell it, do what sells.
3. The project timeline and rehab plan are crucial as you mention. What we recommend for lenders is if you cannot visit the project, hire a third-party inspection firm (bank lender inspections). They run around $250 each to go check out and confirm percent complete of work.

 4. We do nothing more than 12 months BUT will have language in the deal for extensions up front. Want an extension it will cost 1-2 points

5. Make sure you have a default interest rate. If the rate is too low, some borrowers do not care (for example 8% loan, if they do not finish, they may be like hey its only 8%). Put that up to 18-22% default and then there is more sense of urgency.

6. Never ever ever do owner occupied

7. Understand their plan.  What are they doing with the property. If they are like, "I think I may rent it or sell it". That is not a plan, they have no exit strategy - to me that is problematic.