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.