Posted almost 8 years ago

Hard Money Facts of Life for Real Estate Investors

With virtually anyone being able to claim they are a hard money or private money lender, how do you determine if you’re dealing with a scam or a legitimate lender? This analysis will help you quickly qualify a potential lender.

a) References are the number one key to qualifying lenders, contractors, real estate agents, tenants, and other people in our industry. If you would agree that the best marketing is word of mouth, consider that it is also the absolute best way to avoid being scammed. The major players in our market have multiple references and happy customers to back them up. I apply this logic to everyone I hire/do business with. If I’ve never heard of you, I’m taking an unnecessary risk and I owe it to myself to conduct extraordinary due diligence before I give you the green light. There are too many honest vendors out there to choose from that can provide references. Avoid the unnecessary risk and the trail of tears.

b) Location of the lender should be considered. While there are big national hard money lenders out there that have multi-state footprints that can be good choices, the small out-of-state lenders should be avoided. Real estate investing is a local game and you should network and know the local players anyway. In Houston, all of the hard and private money that you could ever need is more than likely less than a 45 minute drive away. There is no reason to give the time of day to some out-of-state small fish that no else has ever heard of.

c) Competitive Interest Rates and Points in our Houston market currently consist of approximately 2-4 points and a 10-15% interest rate. The terms offered will be dependent on how strong a borrower you are. If you find a lender offering something much less than that,BUYER BEWARE! If it sounds too good to be true, it probably isn’t. Some scam artists offer low rates to entice investors to sign up with them, charge the investor application fees, and then disappear.

d) Upfront Fees for applications should be $1,000 or less. Also known as a commitment fee, this may cover the cost of an appraisal, credit pull, and the drafting of loan documents. That fee should also be credited back to you on the HUD at closing. I would be nervous if a lender charged you a fee higher than that.

e) Exit strategies should be established before an investment is made. I mention this specifically for landlords. A landlord should know exactly who their long-term conventional lender will be before trying to get into any deal. A landlord will use hard money to get into a deal and use conventional financing for holding onto the property after repairs are made. As a landlord, you will want to be sure that you qualify for a conventional loan and that you are satisfied with the rates and terms being offered. If you put down earnest money or a down payment on a rental property without knowing if you’re even qualified, you will have wasted your time, the seller’s time, and the agent’s time and you may end up losing your earnest money. Just don’t do it! Know your exit strategy and get qualified.

download None of these rules should stand on their own as absolutes by themselves. But by stacking them and using them together you will avoid a lot of heartache and nonsense. Understand the risks involved, get qualified, and take action. I have access to over $35M in financing available across multiple national and local lenders that I’m comfortable with and they have an established track record of performance. I also have access to about 40 discounted flip and rental properties per month to choose from in the Houston market. If you need a hand, drop me a line!