How to Deal with Hard Money Lenders

Dealing with lenders

Despite their name, working with hard money lenders is much easier than with their conventional counterparts e.g. banks. The majority of these lenders are focused on bringing flexibility and transparency to business deals as well as restricting the amount of red tape that borrowers have to deal with. Nonetheless, here are a few secrets to getting the best deal when you’re negotiating your hard money loan:

Know how hard money works:

Hard money loans require a tangible asset to secure the loan (i.e., act as collateral). The term hard money is typically used to refer to real estate secured loans.  The lender determines the viability and amount of the loan based on the value of the property rather than the credit history of the borrower.

Know where the funds come from. 

Private lenders fund loans with their own capital. This allows them to make decisions directly without consulting with a third party (such as a loan committee).  Borrowers need to understand the difference between a direct hard money lender and a loan broker.  A direct lender actually controls the money to fund the loan and can indeed make decisions without consulting with a third party.  However, many loan brokers represent themselves to borrowers as direct lenders when they are in fact just a middle man between the actual lender and the borrower.  This means that the broker has to collect the information and send it on to the actual lender who in turn makes the decision to fund or not.  This creates delays in getting a go/no go decision.  It also adds another layer of fees that the borrower will have to pay.  The broker will take a fee and the lender will take a fee.  Borrower should make every effort to find out if the lender they are thinking f working with is a true direct lender or is a loan broker misrepresenting themselves as a direct lender.  A direct hard money lender needs to impose stricter terms and higher interest rates than conventional lenders in order to protect their investment. Banks do extensive research into the borrower’s past tax returns, bank balances and reviews all their sources of income and expenditures.  Hard money lenders just look at the property.  Borrowers should also be aware that hard money lenders are not governed by banking laws, which allows them the freedom to underwrite loans that conventional lenders would reject.

Research your lender:

You can often find testimonials and starting terms on the lender’s website. You can also call and ask for references; reputable hard money lenders will be happy to provide you with this information. It can also be a good idea to call with your loan request or to email a loan summary prior to setting up a meeting.

Prove your project’s value. 

Before meeting with a lender, you should be prepared to prove the value and viability of your business plan. You will be dealing directly with the decision-maker; therefore, it’s important to show that you know what you’re talking about and can back up any claims about the value of the property (especially the resale value) with actual numbers. While private lenders require less documentation than conventional lenders, they will still want to see financial statements, especially for income-producing properties. Also, while not usually necessary to close the deal, good credit history can sometimes help influence the interest rate they offer you.

Have an exit strategy. 

The high interest rates of hard money loans mean that it is in your best interest to pay it off in full and on time. Most lenders will want to know how you plan to repay the loan before even agreeing to lend you the money. It’s also a good idea to be diligent in meeting any and all deadlines set by your lender as it will make them more willing to agree to an extension in the event that you need more time.