All Forum Posts by: Jared Sandler

@Cameron Rockwell very kind of you. Thanks so much! Haha I'd consider it if they asked! I don't know how to go about that...

Characteristics of Hard Money Lenders

A bank's role is to supply financing first by evaluating the borrower and the borrower's financial state, including taking into account their debt compared to their income, commonly known as a debt to income ratio. Once those thresholds are satisfied then a bank would lend on the underlying asset. They simply lend a percentage of the current value of the asset with the borrower bringing the rest to the table. In general banks don't like to lend on distressed assets because they don't have mechanisms in place for evaluating the end value of a deal or monitoring the renovation of such a project. On the other hand, a hard money lender's role is to supply financing by evaluating the borrower with simple criteria of cash in the bank and credit and then they dive into the future value of the distressed property after its fixed up, also known as the after repair value or ARV.

Threshold considerations in choosing a hard money lender might include:

• Does the lender specialize in hard money loans? Unfamiliarity with the hard money loan process might lead to miscommunication and miscalculation by you and your lender.
• Is the hard money lender local to the area where your investment property is located? If the hard money lender does not know the investment property’s real estate market, you may spend precious time educating the lender instead of flipping your property. Plus a lender with a footprint on the ground can give you valuable insight into a specific area or property.
• Is the hard money lender a direct lender or a broker? While both types of lenders can get you a hard money loan, generally a direct lender will be able to make decisions quicker and ultimately close faster since they have their own capital and make the decision in house. In addition there may be less fees when using a direct lender since a broker typically makes a commission on top of what the source of capital is charging.
• Does the hard money lender have written loan qualifications? Knowing upfront that you or your property do not meet the lender’s qualifications will avoid wasting time applying.
• How quickly can the hard money lender approve and fund hard money loans? If the hard money lender takes too long to approve and fund loans, you might run out of time to secure alternate funding before the property is sold to someone else.
• What is the cost of hard money lending? Hard money lenders typically have less overhead than banks. Nevertheless, hard money lenders do charge fees and these fees will vary. The use of leverage, speed and ease of access to capital needs to be taken into effect when considering the cost of the loan.
• How long has the hard money lender been in business? Hard money lending is a niche market that has legal, regulatory, and commercial processes that are unlike banks or mortgage brokers. An experienced hard money lender will reduce the likelihood of incorrectly prepared documents or mistakes in the application, approval, and funding process.
• What is the hard money lender’s reputation in the community? Hard money lenders may serve a niche market, but they still earn a reputation with real estate agents, bankers, and real estate investors. A hard money lender with a strong business reputation will not only work with you in a professional manner but may open doors for you within the real estate investment community.
• Does the hard money lender have any staff members with licenses or certifications? There are no national or state organizations that certify hard money lenders. However, every state regulates real estate brokers and lawyers, and many hard money lenders have licensed brokers and lawyers on staff. A hard money lender that has licensed brokers and lawyers is less likely to do anything that could jeopardize their licenses.

In addition to the way the hard money lender conducts business generally, you will also want to make sure your investment strategy and investment property match up with the hard money lender’s preferences.

Investment Strategy

Different hard money lenders may prefer specific types of real estate investing strategies. For example, a hard money lender might prefer fix-and-flip transactions while others prefer buy and hold transactions. As a result, you will find varying terms for hard money loans, including:

• Duration: Although all hard money lenders intend their loans to be short term, the duration of loan terms will vary. Some hard money lenders are more comfortable with longer-term loans (on the scale of a year or more) while others prefer shorter-term loans (on the scale of less than a year).
• Interest rate: Interest rates will vary among hard money lenders just as they vary among banks and mortgage lenders. Shopping around will help you find an interest rate that works for your project.
• Loan amount: Most hard money lenders will require cash in the deal so that you have “skin in the game.” However, the size of the down payment will vary with different lenders. Stated in a more measurable way, the maximum loan-to-value ratio will typically run somewhere between 65% to 75% but different hard money lenders will fall at different points within that range.

Investment Property

Since hard money lenders focus on the asset and the transaction, many of the characteristics that you might use to choose a hard money lender arise from the lender’s familiarity and comfort with the type of property you want to invest in.

Thus, before you can choose a hard money lender, you need to target your investment properties. For example, some hard money lenders work exclusively with commercial real estate investors. Conversely, other hard money lenders only finance residential real estate transactions. Finding a hard money lender that understands your asset class and is comfortable extending hard money lending to you can speed the application process and reduce the risk of friction later.

This is particularly important if your proposed real estate investment does not fit squarely into the definitions of commercial and residential property. For example, some hard money lenders might balk at funding investment in undeveloped lots, churches, or agricultural land.

Choosing a Hard Money Lender is Like Choosing a Business Partner

An intangible factor in choosing a hard money lender is your comfort level with the lender and the staff that you interact with. A hard money lender invests time and money into your project, so you need to be able to trust each other and work together to reach a common goal.

Unlike a bank that only wants to receive its loan payments, a hard money lender truly wants you to succeed because your success means that the real estate investment project will be profitable, and just like you as the investor, the hard money lender has earned a return on the investment. In this respect, you and your hard money lender are in a symbiotic partnership. Your hard money lender provides the financing to fund your real estate investment and you put the hard money lender’s money to work in order to earn a profit. A successful deal means you as the investor hopefully comes back to utilize the lender’s money again on another project in the future!

Every HML will work somewhat different but I will let you know the standard flow:

1) Get pre-approved with an HML - This should be free. DO NOT PAY AN APPLICATION FEE. This is a sign of a possible scam.

2) Look for a property and get it under contract.

3) Send the executed contract to your HML. They will let you know what other little paperwork may be needed and probably order an appraisal. I am always skeptical of the HMLs that don't require an appraisal. An appraisal is the only thing you should ever pay for before you close the loan.

4) After the appraisal comes back you will get a document that outlines the amount to be borrower and all fees that will be relating to the loan (I would suggest to ask for an example of this document when you are searching for an HML so you will know what fees are going to show up).

5) Close the loan at a title company of your choice.

6) Begin work and make draws on any repair balance. Most HMLs will pay for work completed. To have the funds released you need to have a third-party inspect the house and the repairs made. Then they will release the funds based on what is finished.

7) Sell the home and payoff the loan / rent the home out and refinance the borrowed amount.

Hope this helps give a simple time-line. If you are looking to do a refi at the end of the hard money loan, I would suggest lining up that refi company at the same time you are looking for hard money. Your HML may have a company they work with frequently that will make it a smooth transition so ask.

@Duman Umanzor if you're looking for someone on the lending side to be a part of the group I'd love to join!

After finding an HML that will lend where your prospect house is (most will only lend in major metro areas or have steeper rates if they do lend outside metro areas), I would ask these questions:

Are you a direct lender?

This will be a gateway question. If the answer is no, that means they are a broker of some type. Typically this means they will take longer to close, may not have all the information of the companies they work with, and most hard money brokers get their money by taking an existing product and adding extra points to pay their fee. Only continue on if the answer is yes. The person you are speaking to should have an email address with the name of the company and work directly for that company. Otherwise you could be getting yourself in to a bad situation.

What is your investor success rate?

This is important to know but can be lied about very easily. Many don’t track this statistic. I don’t know if it is because they don’t really care or just haven’t thought of it. I think it is probably the most important stat. Look for groups who offer referrals to local contractors, Relators, etc. Also, look for groups that have boots on the ground in each market that know the specifics of investing in that area.

How many loans have you closed in this month?

Any good HML will know this number off the top of their head. You want a lender that is busy and closing loan in your area. Who cares if they closed 100 loans in other states, find out what they are doing in the same area you plan to be. If they are closing a lot of loans, they probably have something good to offer. A good number will vary based on the current market and the size of your metro area.

What is your maximum LTV and Initial Funding?

This is normally expressed as a percentage and that percentage is of the ARV. Most companies are between 65% and 75%. The higher the percentage, the better for you. That means they will lend more. Initial funding levels are a back way of putting the down payment required. If a company says they have 85% initial funding, what they really mean is they are going to require you to pay 15% of the purchase price as a down payment on top of the closing costs and LTV requirements. Right now most HMLs are between 85% up to 100% initial funding. Initial funding of 100% means there would be no down payment.

Do you require an appraisal and survey?

Most HMLs will require these. I am wary of the ones that don’t require an appraisal. The lender will perform a desktop appraisal but they will typically have a short view on the value of the property to protect the company’s investment which means you will be coming out of pocket more. Small-time HMLs may not require an appraisal but this could be because they will drive out and view the property themselves. Survey is a toss-up on whether or not it will be required.

Is there a pre-payment penalty?

Some will require you to pay the interest through the term or another length no matter how long you hold the loan. Just make sure that you include this requirement in your costs.

Do you have relationships with refinance lenders?

Make sure that they have a good relationship with companies that will refinance the loan for you if you are using a BRRRR method. You want to see something that has low or no seasoning for a cash out refi or that may require low amount of documents.

What is your draw fee & benchmarks for the repairs portion of the borrowed money?

Know what your fees will be to take out the repair money borrowed. Draws are almost always held back until you reach certain points in the project or that work is completed. They will also charge you to have an inspection by a 3rd party to make sure the work is done. I have seen this range from as low as $100 up to $300.

Do I need to pay anything before sitting at the closing table?

There have been numerous people on BP talking about how they paid application fees but they could never get their loans closed on any deal brought to the company. This is a practice by some less than reputable companies. One I saw charged $500 upfront to be pre-approved and would never actually fund any loans. Just beware. Most reputable HMLs will not charge anything until you are sitting at the closing table and all fees will be listed on the HUD-1 closing document.

And of course, what are the points, interest, and attorney/document/admin fees for the loan?

This will vary based on region but in general 2 – 5 points, 11% - 14% APR (meaning this is the annual rate so divide it by 12 to get the monthly interest amount), and documents fees can be from $600 – $1,900. The document fees are what will vary wildly from company to company. Just know them going in so that you can properly budget. You will also want to find out if payments are interest only or if some principal is built in. Most hard money will be interest only payments on the full approved balance of the loan whether or not if you have pull the draw funds for repairs.

If you have any other questions, post them below so that we can all learn from the answers.

Just curious...what are some of the challenges you have dealt with when using a hard money lender vs a private lender? what are the benefits of each?

@Berron J. got it! 

@Berron J. everyone is different. I work for a HML that's been operational for a decade with over 500 million in closed loans and we don't require LLC and we are also not shady. In what state are you trying to invest?

@Anthony Barrueco Yeah...it's good to have that in place. TBH, if a lender knows you're borrowing out of state and doesn't vet you on who will be able to be on-site, i'd steer clear of that lender because they clearly don't have your best interests in mind. It's really for your own benefit because of GC's drag and work isn't getting done that's ultimately more money out of your pocket and more risk. 

@Doran Summers is 110% spot on with having a team in place...and that's important whether the deal is out-of-state or local. 

@Zachariah Hays my pleasure. I think with HM, not every deal makes sense and honestly not every lender makes sense. Find the right HML and you could get into a good rhythm, though. The good HMLs don't just say yes to any deal...the good ones will turn down deals b/c they are worried about your ability to get in and out of the deal!