Hard Money Lenders: What are they looking for?

Question

Hello everyone, I'm new to real estate investing and have one duplex I own in St. Paul, MN. I'd like to expand and purchase more property. My focus is set on purchasing an apartment complex that has a minumun of five units and to live in one of the units. I've been advised that finding good Hard Money lenders is a smart route to go because my ability to pay 20% on a conventional loan is limited, at this time. My question is, what are hard money lenders looking for? Good Credit, guaranteed money back, skin in the game (money down)???? I'm not a multi-millionaire (yet) but I'd like to know what they look for in a good deal and in a good borrower.

Travis Sperr · Answer

Keeping in mind that every lender is different - they have different appetites and risk tolerances (pricing typically is relative).

Lenders want to see:

A good deal - something you can make money on - that should be important to both parties

Some liquid assets - Money in the bank, the ability to handle a deal if there are cost over runs or a long holding period.

Experience - always a plus - if you don't have it - have people on your team that do have it and can speak intelligently about the deal - contractor, agent, take out lender, mentor, etc.

Exit Strategy - a clear exit strategy - if flipping - how long to complete repairs and relist, estimated time to contract/ days on market, plan if no offers at asking price. if a Refinance - who is the lender, have they done like transactions, have they looked at your full file or just approved you based on an initial conversation. 5+ units - how long does the asset need to be stabilized before refinance can be done?

Credit - not as important on a flip - if it inst great, be prepared to explain what happen.

Income - not as important on a flip - but likley verified with taxes, paystubs, etc.

Be Honest, Professional and Timely - If this is a business for you, treat it like a business. If you are lacking one of the major items just communicate it. If your lender request docs send them over as soon as you can to keep your file on the top of their list. Organization goes a long way, no one wants to dig through a file to find information.

Once you have done a few deals with your lender they will go out of their way to help you. The relationship is very important.

Good Luck!

Jeff Rabinowitz · Answer

BP is a great forum. There are some very experienced investors who freely share their experiences. The previous post (2 before mine) is an example of why you must be careful of who you accept advice from. The poster states he has no experience but has asked the same question. He then proceeds to provide the best answer he has found. If he has no experience how has he determined what the best answer is?To answer the OP's question,  HMLs will consider everything a traditional lender will consider but will often be willing to lend when a traditional lender will not. "Good credit" will usually get you better rates and terms but may not be necessary if the deal has enough equity or the borrower has enough experience creating equity. This does not necessarily mean a good credit score. Some lenders will not even pull your credit score. They will usually ask for references and indications that you keep your word and satisfy your obligations."Guaranteed money back"--what does this mean? There are no guarantees.  "Money down" will always help get the best rates. Many lenders will not lend without it. Your money in the deal shows you trust your own ability to complete the project and shows the lender that you have something to lose if the project takes a wrong turn. Your money helps protect against the lender taking a loss and makes it less likely that you will walk away from the project. Lenders want their money paid back. They will take your equity if they must but that is not their primary business.

There are many types of lenders with many different types of criteria. Some will prefer certain geographic areas, some will prefer certain types of projects, some will prefer certain types of borrowers. The longer your history of completing successful projects, the stronger your deals, the better your plans and the better you get at executing your plans, the more exit strategies you master, and the more of your own funds you are willing to commit to your project, the more likely you will find a lender to partner with at favorable terms. Best wishes.

Jay Hinrichs · Answer

@James Cannon  rates are different in almost all states.

Jay Hinrichs · Answer

@James Cannon not much to add to the advice above.. other than when I ran my HML shops I was a relationship lender.. I wanted to meet and know my client... this is what I do today.

Character and experience are important to me... along with experience.. If I choose some one with little experience I am doing that to groom them to become a top performer..

other wise need lots of expeierence I think the biggest thing I see from those that are not use to HML or trying to get into flipping is

1. thinking that HML are only asset based.. NOT true was true prior to 08 in a limited fashion but we learned the hard way that asset lending only is far to risky.

2. you need some money... granted I do no money down deals but those ware with my trusted clients of a decade or more with lots of water under our bridge or as forementioned I pick one or two beginners and I groom them.. and I pick them for specific reasons.

3. credit and income  Most HML want to see this.. if you don't have massive experience.

4. anyone advertising rates under what @Jason Hirko mention is probably out to get due diligence money from you and won't fund.

5. Investor simply do not know how to run the numbers and by the time you run them for them and they are not really making any money they say OH I see what you mean.. its funny how basic math is just lost on many folks  LOL

Steve Babiak · Answer

HML do not want to do owner occupied property, so forget that already.  The 5 unit deal might not fit lending criteria of some HML, so you might have to ask around on that.  The HML that do residential only will limit their loans to property with 4 units max.

James Cannon · Answer

Account Closed, Ill check it out. Thanks!

George Krajacic · Answer

Hi James,

You already have some excellent answers and I apologize in advance if I give advice that has already been given. I scanned thru the posts and might have missed some answers. I have little different approach. I am HML and my advice is “keep away from HMLs if you can. HMLs are not well suited If you are buying to hold. In your case there is much simple approach. Since you are planning to live in one of the units settle for buying only 4 units and get 30 years FHA loan at 4% WITH ONLY 3.5% down payment requirement.  “PROBLEM SOLVED”

I hope you qualify for FHA loan,

Good luck,

George

James Cannon · Answer

Cool, thanks @Jay Hinrichs

James Cannon · Answer

Thanks for weighing in @Jay Hinrichs! Are you still in HML? Do the rates vary by state at all?... @Jason Hirko is in California and I'm in Minnesota, is it possible rates could be different from city to city?

James Cannon · Answer

Thanks for your perspective @Jason Hirko!

Hard Money Lenders: What are they looking for?

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