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