How to pick a hard money lender?

Question

Over the last year, my fix and flip business has grown gradually and it looks like to grow further I'm kicking around the idea of trying to use some hard money to fund more projects and to get used to working with hard money. I was planning to use hard money very conservatively for now, maybe for a start only funding 10% of the project. As such, I did have a few questions I was hoping fellow BP members with hard money experience could answer.

1. How does one go about picking a hard money lender to work with? Aside from terms and interests rates, is there anything else to look out for?

2. Does hard money work better for properties of certain price points than others? or certain types of properties etc? especially if one was borrowing up to say 70% of LTV? My rough calculation gave me a feeling that HML loans in my specific market was a solution up to about $250K, beyond that, the interests rates as an absolute amount was so high it starts eating up the profits. Anyone has thoughts on this?

3. When using hard money, besides keeping a reserve aside to service the loan, is there techniques one can do to make sure hard money is used safely as a tool?

Thanks in in advance.

Jeff S. · Answer

First, most hard money lenders will not want to deal with relatively small amounts, say $50k to $100k, especially in California.  With prices here, most CA borrowers don't have this problem, even now in the Inland Empire and Apple Valley.

Rather than rewrite it or quote, you might check out this related thread which outlines many of the questions you could ask an HML and a few ways to ensure they are honest.  It should answer your first question:  Private Money Lender - How to Qualify the Lender?

Among these is to ask whether they will defer all points and payments until you complete the project.  In CA at least, I know these exist in several instances.

While hard money is not cheap, the points and interest are usually set as a percent of your loan amount.  If you buy sensibly, your profit should also increase with the ARV.  So, I don't understand why you believe there is a $250k crossover before an HML doesn't make sense.

Where you will get killed are on junk fees and some HML's can be brutal.  These tend to be fixed and can significantly eat into your profit, especially when they become a substantial percent on lower value deals. It's important to shop hard and understand all charges in advance and in writing.  This applies to both your buy and sell closings.

Obviously, the less you borrow per deal, the more money you will earn.  If you have just a few properties and the cash to fund them all, it makes sense to go this route. Once you have more deals than money, and I hope this happens to you, you'll want to leverage yourself sensibly, balancing your cash on hand with the opportunity to buy more properties at a time.  Most of the higher volume rehabbers we know eventually borrow both the purchase and rehab money.

In all cases, you'll have to find profitable deals.  These can be thinner if you are self-funding but also require more discipline since there is no one around to say "No."  Some HML's won't care if you make money and will fund any deal at an LTV that keeps them safe.  Others, won't participate unless they know it's a property that both of you will make money on to keep you alive and hopefully, thriving.  In my view, this is the difference between long and short-term thinking.

Good luck, CK.

Jared Rine · Answer

@CK Hwang

@Jeff S  hit the nail on the head.

I would add in response to your questions, being someone who brokers hard money loans and deals with lenders and investors, that other qualities besides rate and terms is your comfortability with the lender or their representative/broker and them actually following through when you need them to, no surprises at funding, etc.  I've had experience myself with private individuals where I put the whole deal together and at the 11th hour, my private money person (whoever it was at the time) decided the deal wasn't for them and backed out.  I don't usually have that problem anymore, but it has happened, so make sure that the follow through is there.

As far as leverage and profitability, finding projects that work is going to be the key.  I have a lot of guys that lend out at 12%, and sometimes more and the borrowers I work with are still making a killing on many of their projects, so that is likely in your ballpark. Most of the lenders I work with will not lend if the project does not make sense to you and you're making money because if you're both making money, then there is definitely enough spread and profit margin within the project, making their investment 'safe.'

Just my .02

Ben Stoodley · Answer

You're welcome @CK Hwang  - good luck!

David T. · Answer

I had a great conversation with an experienced borrower from the UK yesterday, a very colorful character from London. We were discussing start-up relationships with HMLs and I quote from him;

"Hard money guys are like women, the let you think you pick them, but in reality it is the other way round!"

:)

Good luck anyway!

Ben Stoodley · Answer

@CK Hwang

Being an investor and lender myself, I think financing your deals could expand your business very nicely. It will allow for more deals being done in a shorter period of time and in the end a higher net profit because of the volume.

There are many things to consider when picking your lender, here are a few of the most important points to weigh out when deciding (in my opinion):

1. DIRECT Lender - you want to deal directly with the check writer, not a lender that has to confirm deals with their investors. This allows the possibility of deals falling out of Escrow after the lender committed to you, then couldn't get the backing from their investors. Always ask if the money is in house and fully managed. Further, ask how long it would take them to fund a deal if all the paperwork was turned in, it shouldn't be more than a day or two.

2. Long Term Relationship - your HML is your financial partner and it should be viewed this way from both ends. The Lender should value your business and want you to be a returning customer. We always become more flexible with our rates when borrowers return with more business each month and proves to be a good client. Having this good trustworthy relationship will allow for highly efficient transactions and business planning as a whole, not too mention a more lucrative business for you.

3. Points/Fees - of course private money is expensive, but don't pay more than you need to. Most all lenders will be in the same ballpark when it comes to interest rate and origination points. This can be found by calling or visiting 4-5 local lenders websites. In California, I'd say the average is around 3-4 points and 11-12%. However, where you will waste a lot of money is in the unnecessary junk fees. They can be called processing, appraisal, inspection, underwriting, etc. fees. Make sure to ask what ALL other fees amount to after the origination fee  (points). This can easily amount to an extra $3,000 very easily.

Hope this helps out a little. Feel free to ask any further questions.

Good luck!

-Ben

CK Hwang · Answer

Thanks for the advice Jeff

The reason I say there is a certain price point were it makes sense for hard money lender is just because I noticed from the stats of our previous projects that the percentage profit margin isn't linear, with the highest margins in the lowest end projects (rough neighborhoods, but being out of our risk tolerance we wholesaled it off) and the highest ends projects (risk of it sitting on the market for a long time). Of course these 2 extremes tend to also carry the most risk.

Let me think deeper into this issue of HML. Thank you once again.

CK Hwang · Answer

Hi @Ben Stoodley , thank you so much for your insight. I think point 1 about the lender being the check writer was a really good suggestion. I often get calls from people wanting to lend money, but it's hard for me to tell how many hands this lump of money has passed through before reaching me, each one taking a small chunk, and that is why I've always been hesitant to use a HML versus working with a direct investor.

How to pick a hard money lender?

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