Hidden Facts About Hard Money Lending

One of the most common ways of finding finance capital is through hard money lenders. Many new investors ignore this outlet based on the perceived notion that they wouldn’t be approved, or the rates and fees are too high. Instead of talking to a hard money lender and finding out how they work, they simply ignore them. With the right hard money relationship nothing can expedite your business growth faster, especially if rehabs and flips are your thing. Instead of spending your day trying to find capital to fund your next project you can spend time finding the right project to work on. Approaching a hard money lender should be intimidating or overwhelming. They want your business just as much as you want theirs. Here are five things you may not know about hard money lending.

• HML Is A Viable Bank Alternative:  The way investors think about hard money lending has changed dramatically over the years. In the past, hard money lenders were a last-ditch option if you were in foreclosure and wanted to save your home. You would pay a high interest rate and outlandish fees, but you didn’t care because you were able to keep your property. Over the years hard money lenders have changed their approach but are still a viable alternative to the local bank. Instead of lending on credit score and debt to income, they look more on the prospects of the property and the deal. An application that would have no chance getting approved with your local bank could be a slam dunk with a hard money lender. This gives you access to capital that you would otherwise have no chance of getting.
• Not Everyone Is Approved: As open to deals as hard money lenders are, they still have lending guidelines and perimeters. They don’t just go around giving a blank check to every new investor who wants one. Every hard money lender has their own specific lending criteria that is important to them. Most just want to see an ability to repay, but others need a specific loan to value and others will scour through tax returns. As much as hard money lenders don’t act like a local bank, they act exactly like a local bank. They know what is important to them and whatever that is they focus on it fully. You may have a seemingly great deal but if it doesn’t work for the specific lender they will pass. This doesn’t mean your deal is dead, but you will have to find a different hard money lender. It is advisable to talk to a handful of hard money lenders prior to presenting any with a deal. Find out what items are important to them, what are red flags and what are deal breakers. You don’t want to keep presenting deals and scenarios that don’t fit their lending guidelines. Hard money lenders want to make money but know where to draw the line.
• Don’t Get Hung Up On Rates/Fees: Before starting your hard money lender search there are a few things you should know. For starters, the rates they charge will be much higher than a local bank. You can forget about all the 4-5% rates you see in your local newspaper. Hard money lenders understand supply and demand and know if you could find a local lender you would probably use them. You can expect to see rates anywhere from 12-15% depending on the scenario. At first glance this sounds outrageous, but upon closer inspection it shouldn’t influence your decision. Your plan should be to hold onto the money for 120-180 days, max. Sure, you are paying a high rate but if you can earn a higher ROI, it is certainly worth it. The second item of note is with the fees. Hard money lenders are not bound to any RESPA rules regarding fee. They typically charge in the ballpark of two to four points. Again, this is initially hard to swallow, but if you look at the big picture it is simply the cost of doing business.
• An Established Relationship Can Change Your Business: Like anyone else, hard money lenders like to work with people they know and trust. If you bring them a consistent flow of business, you can renegotiate the initial terms and fees. More importantly, you may be able to get an open line of credit. Instead of having to run every deal by them and wait for approval you can have capital at your disposal. This gives you the freedom to act where you see fit, reducing the wait time and ultimately getting more deals. This takes a good amount of trust on both sides but is not out of the realm of possibility.
• You May Not Need Upfront Capital: As we stated, every hard money lender is a little different. It is possible that you may not need upfront capital to establish a relationship. Many lenders allow you to roll in the rehab costs and pay back when the property sells. This is a great benefit if you have limited capital or you don’t want to tap into lines of credit or IRA accounts. If you shop around and talk to several hard money lenders you may be able to find one that fits your current capital profile.

Hard money lenders can change your business overnight. You shouldn’t be intimidated to reach out to them and initiate conversation. The more you know and understand about how they operate, the more likely you can establish a relationship.