When to apply for private lender/ hard money lender?

Question

Hi BP community,I would like to get some feedback on when you should look for private lender/ hard money lender. Seller/ wholesaler usually ask for POF if you want to get into contract for the property. So if you want to close the deal fast, you need to have cash available. On the other hand, private lender/HML wants to see the deal first before talking money. Ideally, I think you can develop the strong relationship with a few investors that you build trust on and they can provide POF instantly. But when you get started, how should you proceed? Thank you for the feedback!

George Krajacic · Answer

Hi Tuan,I think I understand your dilemma. I’ll try to provide some more clarification and hopefully some good answers for your questions. It’s important to know that you won’t likely find a lender or investor to give you a proof of funds letter based on trust/a built relationship. But just because you couldn’t get POF “instantly”, doesn’t mean you can’t get one in a very short turn around adequately for your seller’s needs. But do start talking with lenders before you start looking for properties. It’s important to know their terms, costs, and requirements to make the important project analysis. A private / hard money lender doesn’t need to see a contract first (if that’s what you mean by deal) most of the time. They need to have enough figures to be able to analyze if the proposed deal makes sense. You should already know these numbers if you’ve calculated the maximum amount you could pay for the house and still make a profit. It’s important to be able to be able to analyze a property like a lender does for two reasons. First, you won’t be in the rehab/flip business if you can’t accurately calculate all your costs to determine your optimistic and pessimistic profit projections. Second, it will help you be relatively certain that the lender will fund the project. When you analyze a potential flip you must have certain information to decide what offer you are going to make. First, you need to determine After Repair Value (ARV). Then, you have to know how much you going to spend on repair and the time it will take to complete a job. Finally, you have to know what you are going to pay for financing. Only with above information can you determine what is the maximum price you would be willing to pay for the property in order to make acceptable profit. You can plug the above numbers into a flip calculator. There are many available on the web and here at biggerpockets or I have one available on my website that lets you compare scenarios side by side. It doesn’t take long to analyze a project once you have some practice. Many lenders, including myself, could turn around a POF letter within a day. When you develop a relationship with a private or hard money lender and you are knowledgeable at analyzing deals, I’m sure they would be happy to provide the letter quickly, especially when they know you aren’t bringing them a bunch of duds! Good luck on your projects, George Krajacic, Cornerstone Company

Darren Eady · Answer

Unless the seller chooses your offer over other actual cash offers. It allows the seller to pull out of their contract with you, and potentially keep your earnest money, if another offer comes along during your loan process because you did not intend to buy the property with cash, but with a loan instead.

Tuan L. · Answer

@Charlie FitzgeraldThat is good to know! Thank you.@Darren Eady Thanks for your clarification between a cash offer and the money from private lender. From the seller point of view, is there a difference between the two? I think as long as you can close fast, it is all matter to the seller right?

Darren Eady · Answer

You use hard money when you are lacking one of three things: 1. Credit 2. Income or 3. Time. If you can't show your income (for whatever reason) you cannot qualify at a bank. If your credit score is not up to par, you can't qualify at a bank. If you don't have the time to wait for a bank to process your loan and you'll miss your deal if you don't close quickly, a bank loan won't work. If you CAN get a bank loan, you should. If you are lacking any one of these three items, a bank won't work for you and you should use private money or hard money to get your deal.Another item you alluded to is a cash offer is better than a offer subject to financing. Using hard money is NOT a CASH TRANSACTION. I've had to explain this to clients over and over again. If you are getting a loan from a hard money lender, and many private lenders, or a bank, the loan WILL SHOW ON THE HUD, which means your transaction is subject to financing - NOT a cash offer. Unless your parents are putting money into your account, your lender will require a lender's policy of title insurance and a loan will show on the HUD making your transaction not a cash transaction.Typically, if you disclose what you are doing, it's tough to go wrong. If you hide what you are doing to make it work, it's usually the wrong thing and the penalties can be stiff.

Charlie Fitzgerald · Answer

Tell the seller, seller agent, or wholesaler you will provide them with a LOI for funding within 72 hours of contract acceptance and then work with a HML lender that can provide that.