How can you prove this is legit?

Question

Sooo... most HML will tell you (it’s in my interest that your deal works out) which sounds good and fairly legitimate given that if the flip doesn’t sell after rehab they probably don’t get paid timely and have to jump through some hoops. But is that actually true? Do they really have your best interest at heart? Reason I ask is that I want to use one for a flip but a little weary? Wanting to cross the Ts and dot Is.. what do you guys think? What was your experience like with HML? Did you use one for your first flip?

Account Closed · Answer

Unless, you have a seriously lot of experience rehabbing and doing flips I think a hard money lender is a recipe for disaster. Many flippers don't make enough money to pay their HML's. So, why work for free and take the risk.

The very first question before every venture is you have to figure out what the risk is and not what the profit is. You minimize your risk by eliminating anxiety, by not rushing into investments when you do not have the experience and business maturity and when you don't risk money you can't afford to lose.

If I was in a position where I needed to use a hard money loan I would not risk using someone else's money with the risk of my venture going south.

Oh!!! Your question!!! Of course not!!! Everyone has their own agenda and could care less about you with the exception they the HML gets his money back and earns a fat profit from his short-term nearly illegal loan. Are you asking if the HML has your best interest at heart enough so he will bring his toolbox and help you fix the place up so YOU are successful?

Lynn Dee Murrow · Answer

Finding a good hard money lender is critical to success. I would ask other investor around your area about this lender and others.

How do they underwrite the property?

Do they require an appraisal or do they determine the value on their own? If they do it on their own I suggest you consider paying for an appraisal so you know what the ARV is likely to be. It is worth the money to get the valuation right. Then get that rehab done FAST. Otherwise the comps fall off or the world can change on you and you are stuck. Typically real estate values do not change quickly but one bad company can cause issues on a flip or refi.

Do they require draw inspections? How many and what do they cost? I do not mind paying for draw inspections. It gets a third party set of eyes on the property and helps keep contractors honest. You can do that on your own, but you need to do it. Is work progressing? Are the materials the same as agreed to in your scope of work and the signed contract? Are change orders documented and executed properly?

What documentation do they require for draw requests to pay your contractor and what is the delay time for payment? Or will you front the cost of rehab and get it back at the end? This is really important to know if your liquidity is low. You have to sync up your draw schedule with your contractors to your draw schedule requirements from your hard money lender.

Do they have a track record of closing on time and not backing out of deals ( some are undercapitalized and suddenly do not have the money to close).

What are the costs involved if you cannot sell or refi the property by the end of your hard money loan agreement? Will they provide an extension? What is the cost? How long will they extend? Some will extend for 1-6 months, some will increase the interest rate and/or charge an extension fee. Make sure you will not end up upside down if rehab is delayed ( city red tags can kill you)

Are there any backend costs? Some hard money lenders have low interest rates because they charge the rest on the back end. They consider it a plus but you have to calculate the full costs into your numbers up front.

Finally, if you are flipping. Don’t forget about holding costs:

Hard money interest and fees, yard maintenance, utilities, insurance (Make sure you have the right policy for rehab and an empty house - builders risk. If you get a regular policy and are cancelled the builders risk policy will be much higher mid rehab than at closing when you buy) and property taxes that are accruing, And cleaning if it sits for awhile while being marketed for sale or rent.

Good luck, hard money used wisely can increase your profit!

Odie Ayaga · Answer

Yes they want you to succeed. Everyone thinks HMLs wanna deal with foreclosures. No. Not even close. It's not worth anywhere near the effort ESPECIALLY compared to dealing with a repeat borrower. You shouldn't honestly be concerned about what they want. They aren't gonna make or break your deal (unless they're just difficult to work with which happens). Make your deal work, make your money. If you fail it isn't because of them and they'll take the money sure but they'd be happier if you succeeded and didn't get scared out of the industry.

Jeff S. · Answer

A hard money lender would have to be a complete idiot to make a loan to you without the expectation that you will be successful, @Marco Morkous.  Aside from wanting to get paid back in a timely manner, as you point out, there are several additional reasons for this.

First, there is not a lender on the face of the Earth who wants the house and even fewer who want to endure a foreclosure.  This almost certainly means either auctioning the property at a loss, or ending up owning a busted flip that they now have to get rid of or fix themselves.  No thanks.

Lenders are in the business of renting money.  They make their profit from interest and points.  If they wanted to own distressed properties, they have the cash to do so, but it’s not their business model.  Most do
mind if it doesn’t work out.

Second, as difficult as you probably find it to obtain good properties, do you have any idea how hard it is to find good borrowers?  No lender wants to spend the time to develop a good relationship with you and provide excellent service, only to see you fall on your face and disappear.

Third, though these are almost always business purpose loans, a lender can’t take advantage of you.  Predatory lending is still illegal and brokers, if involved, have a fiduciary responsibility to all parties.  They’re not your mom, but if they think you have a lousy deal, they really cannot make the loan.  Of course, the argument is, what’s a good deal?  Ever wonder why legitimate lenders make you jump through a lot of hoops?  They want to make loans to only those they believe will be successful.

None of this responds to the title of your post, which doesn’t seem to match the body of what you wrote.  Also a common question that you might post separately.

Best of luck you, Marco.

Mike McCarthy · Answer

@Marco Morkous I’m sure most lenders would be happy if your flip works out. They get paid, and they’ll probably work with you again.

But most don’t mind if it doesn’t work out. They get to foreclose on a house, which while annoying, is likely a decent asset that they can fix up and sell off.

So really, they are happy either way. You need to make sure you fall into that first category.