Top 3 Reasons a Hard Money Lender Will Turn Down Your Real Estate Deal

[Corey Dutton]

I recently did a survey of all of the hard / private money lenders I know in the industry. I also posted the survey on LinkedIn to get answers from the hard/private money lenders I don’t know. The question I asked these lenders was pretty simple:

“Sometimes a real estate deal makes sense on paper but you decline to make a loan on it. What are the top 3 reasons you decline a real estate deal when the numbers make sense?”

Although I received a lot of different answers to this question, there were 3 top reasons that kept appearing from the majority of the hard money / private money lenders I surveyed.

1. Neighborhood: The property is located in a high crime or extremely distressed area. Sometimes this is where the good rehab properties are found, but if a lender is afraid to get out of his car without a gun when he/she does the site inspection, you most likely won’t get a hard money loan on it.
2. Location: The property is located outside of a major metropolitan area in a rural location where there are no sold comparables within 2 miles of the subject property. Hard money and private money lenders prefer to lend in major metropolitan areas over rural locations. Although a real estate deal in a rural area may look good on paper, if there aren’t sold comps nearby to support value, a hard money lender may turn it down. Also, smaller market, smaller pool of buyers. There are exceptions of course.
3. Borrower’s Cash Reserves: Particularly on a rehab loan, a borrower who seems to be grossly undercapitalized is a sure decline. Lenders want to make sure a borrower can cover any shortages in construction, or in case of a low appraisal for the refinance.

If you are a borrower who has been turned down for a hard money loan on a deal that penciled on paper, please share your experience. If you are a hard money lender reading this, please share your own top reasons for declining a real estate loan where the numbers made sense.

[Ann Bellamy]

Jeff S, you are absolutely correct, we are much more likely to get screwed by a scroundrel with great numbers, than someone with integrity and a thin deal.

As such, the vast majority of my borrowers are already in my network locally, and I may have known them for years. So we will lend to new borrowers, but only if we are confident we can get out whole. Many of those new borrowers have been connecting with me or my business partners for some time while they tried to find their first deals. If I don't know them, someone I know and trust probably does. I spend a great deal of time networking locally. And this is part of the reason I don't lend outside my market area.

We are picky about the location for first timers, because location absolutely matters.

But you have listed yourself as a private lender, and not a hard money lender, so it would make sense that you are mostly relationship based. The way I deal with that is to give better rates to the people with experience that I have known for a long time.