Why You Might Not Want the Cheapest Hard Money Loan

[Nghi Le]

I often tell people to not get sucked into the "cheapest" hard money lender; i.e. that it's not always the best deal for you or for the situation. I think a real life scenario might get the point across better.

I received nice hard money terms on my last Seattle flip:

• 8.4% interest
• 1.25pts
• 95% of purchase, 100% of rehab
• 9-month loan.

It's not the lowest hard money rate (I received 7.14% for another flip in KY), not the lowest points (0.5 - 0.75pts is achievable), etc., but it was a good combination of low cost, high leverage, and decent term length.  Keep in mind that terms like this are typically given to experienced investors, not new investors.  Your terms may also differ depending on where you are; west coast money is usually cheaper than the Midwest.

Now, I'll tell you all the reasons why I don't normally use this type of loan for my deals:

1. It takes 3 weeks to close this thing. This is because of #2 and #3.
2. It requires an appraisal AND an inspection of the property. That's two separate visits to the house.
3. The doc process was a headache. Much more intensive than most hard money loans, and underwriting came back with conditions that made me feel like I was dealing with a bank.
4. It only works if as-is value is at least 10% higher than purchase price. The lender would only allow the high leverage if there's a lot of equity up front and on the back end.

So basically, it only works with deals where there's a lot of margin and a long closing timeframe, and I have the time to deal with paperwork and underwriting headaches. That last part is probably the biggest factor in my book, and what essentially currently defines the real estate financing industry: the cheaper the loan, the more painful it will be. But sometimes it's worth it... for the right deal.

Keep in mind that the most important attribute of a lender is that they close, they close on time, and they close with their original terms (and don't pull a bait and switch at the last moment). And remember that anytime an appraisal or BPO is involved, those 3 things are at risk, unless those risks are mitigated (which is a longer topic in itself).