Looking at Alternative Lending?

Looking at Alternative Lending?
Here is what you are missing in your due diligence that is costing you 10-15% of your profit!

In the last 12 months, my company has used multiple different alternative lenders. They all have their strengths and weaknesses and each lender will have its different borrower qualifications. Some, but not all of the factors they will use to qualify you and your company for their loan product(s) include: credit score, rentals held, flips completed, and cash on hand. Their analysis of the property will include your purchase price, construction costs, and properties similar to yours post construction (ARV - After Repaired Value).

After they are comfortable with you and your project, the lender will send you a term sheet outlining what they are offering. The term sheet will outline your loan amount, interest rate, and the length of the loan. The term is usually between 6 and 12 months.

After the term sheet is received and verified and if those terms still fit the property you are looking to rehab, there are two hot spots to check.

First, some lenders require the interest to be prepaid at the closing table. If this is something the lender requires, it could be for three months or up to full length of the loan. New investors may get scared of points and interest rates. If you break it down to logic, it becomes something as simple a line item on a profit and loss sheet. The best way to think of it is as if it were a utility bill. You are utilizing the lending as leverage two ways; as another set of checks and balances for your deal and that you lower your initial point of entry via your cash outlay to get the deal.

Second, you will need to check if there is a prepayment penalty. In the VERY rare case that everything (and I mean EVE- RY- THING) goes 110% right and you are out of your property in under 90 days, do you owe the lender anything for not holding the loan for a set amount of time? Some lenders want this because they need a minimum amount of interest returned for it to be worthwhile. Other times, they may be using this as an offset upfront cost of the loan. If the lender is charging you points upfront, it is unlikely that your loan will have a prepayment penalty.

Now to the moment you’ve been waiting for!

This part of your due diligence will save you 10-15% of your profit.

In your due diligence of your hard money lender, be 100% sure of what their process is for releasing draws. There are a number of ways the lender can execute their payments to you.

The number one question for saving your time and money:

Who is doing the inspections and what is their knowledge base?

Some other questions to ask prior to executing your term sheet:

1. 1. How long will it be from the inspection request to the actual inspection?
2. 2. Is this in the documents as a term the Lender has to meet?
3. 3. After the inspection happens, how long until funds are released?
4. 4. How are these funds released?

We have spent hours on the phone with inspectors and our contractors. After these conversations, we have come to realize that we were being penalized for finding a quality contractor and having efficient processes! How you might ask? That’s for another time. Stay tuned!

Happy Flipping!