Choosing a hard money lender can seem like a daunting task, which is why we want to give you the ins and outs of choosing the right lender for your needs.
1. Find a firm that specializes in the type of hard money lending that you need.
Are they specialists in the type of property you are considering purchasing?
If you’re looking for capital to invest in a commercial or residential real estate project, select a lender that specializes in these areas.
How many deals have they closed that resemble yours? If you are a real estate developer that specializes in a specific type of real estate, ask the lender how many deals they do on a monthly or annual basis that are similar to yours. This will give you a better idea if they are the best fit for your deal.
Are they a direct lender?
We recommend only working with direct hard money lenders. What’s the difference between direct and non-direct? A direct lender has the cash in the bank to fund your project immediately. A non-direct lender has to secure the necessary funds to close your transaction, which can require a lengthy delay. Many are actually just loan “brokers” who will then contact direct lenders on your behalf. They typically have to contact interested investors, present your investment to a panel and then raise funds. Meanwhile, the clock is ticking and you are missing out on potential opportunities.
2. Narrow your search.
Find a hard money lender that knows your area.
You work with a real estate agent that knows the area, so finding a lender that is familiar with the locale of your real estate investment is just as important. Select a hard money lender that has experience in your specific market. This will allow them to understand the value proposition you propose much more quickly. . A lender that has experience loaning on projects in the vicinity can also connect you with local appraisers and inspectors to help you determine if the property is suited for you. Lenders will regularly use local inspectors to help them evaluate the initial feasibility as well as during the construction process and it is helpful to get engaged with them on the front end.
What is their loan volume?
What does loan volume indicate as far as a hard money lenders’ experience is concerned? It’s simple. You want to know how many loans they process and how much experience they have closing on these types of loans. If a lender has a poor closing rate, chances are you don’t want to mess around and be locked into using them.
How is their draw process structured?
A hard money draw is similar to a bank construction loan or a traditional home equity line of credit. Lenders will require an inspection of the property to verify the validity of the draw request. This inspection will determine how much work is complete, how much work is remaining and what amount of money is eligible for a draw. The same inspector that helped with your feasibility study usually conducts this inspection. Once the lender receives the inspector’s report and information from you, your draw processes and funds are disbursed directly to you. Make sure you know how long the process typically takes so that draws can be planned accordingly.
Generate a list of your top 3 lenders
Now that you’ve done some initial research, We highly recommend taking the time to call each one and take notes to review so that you can feel comfortable knowing you chose the right lender.
Can you get in touch with previous clients as a reference?
If asked, a reputable hard money lender will provide you with a list of references and encourage you to reach out and ask them about their experience with their company. If a lender is not willing to provide you with references, move on. Working with a lender that is well established allows you to develop a long-term working relationship.
3. Know your terms.
Evaluate costs and fees, as each hard money lender is different.
Every hard money lender offers a different rate, point and fee structure. Evaluate the total costs over your expected holding period, so it is easier to make a bottom line comparison.
Understand how they determine loan amount.
There are three methods that lenders use to determine how much they will lend:
Here’s the quick lowdown on the different types of loan sizing:
As Is – Some lenders base their loans on the existing value of the real estate, without accounting for the value creation that might occur from improvements that will be completed. This methodology generally results in a lower loan amount and more borrower equity requirement.
LTC (Loan to Cost) – The amount of the loan is based on the total cost of the project, including the purchase price and the cost of any improvements to be performed. This is a more accurate measure for lenders to determine if an investment has the potential to be a success. If a lender is willing to lend at 90% LTC, this means that you will have a minimum of 10% cash equity invested in the project.
ARV (After Repair Value) – Also known as the As Complete Value, this method estimates the property’s value after all upgrades, repairs or construction are complete. A lender using a percentage of ARV to calculate the loan amount will generally result in the highest loan amount for the borrower.
Lenders will often use a combination of these methods to determine their proposed loan amount. Make sure that they are transparent about their process and that you set your expectations appropriately.
4. Questions to consider:
Does the rehab estimate align with the projected volume?
If you’re looking at doing a large real estate project with a hard money lender, consider if the rehab estimate for repair time is accurate and congruent with the project’s volume. It’s important to stay realistic about a project’s length, so that all parties involved know what they’re committing to.
How profitable will your investment be?
Consider all of your carry-over costs before investing in a project and make sure you have built time and cost contingencies. Hard money loans can be expensive but if things go well, the borrower should make more money with a hard money loan than if equity partners were brought in.
What’s the lender’s history of working with borrowers in case a problem arises?
Maybe you’re a day late or a dollar short because an emergency arose. Are you working with a lender that is understanding and offers some leniencies? Do they have a history of working with borrowers when an extension of time is warranted?
Are you comfortable with the lender’s integrity?
A good lender will be upfront and honest about their process and assessments of your investments and properties. You’ll want someone who will be transparent about their end of the deal so that there are no surprises over the course of the loan.
5. Can they add value to your investment?
Will they evaluate the feasibility of your project?
Work to find a lender that will help you evaluate feasibility and determine if a project has the potential to be profitable or just a hidden money pit. A good lender will also help evaluate your exit strategy and provide realistic insight as to its viability based on their experience.
Will they inspect the property on an ongoing basis?
Look for a lender that will use a professional inspector to evaluate ongoing progress and give you another set of experienced eyes on the quality and progress of work being performed.This is a key for ensuring the success of your project.
Would you use your lender again?
Once you’ve come full circle through your deal with your selected hard money lender, the question is whether or not you’d use them again. The best lenders will develop a relationship with you and will continue to work together for years to come. Look for a lender that you are comfortable with and that you can envision “partnering” in the future.
About Bay Mountain Capital:
Bay Mountain Capital has been in business for more than a decade, closing approximately 2,000 loans over that time period. We specialize in financing all types of residential and commercial property investments throughout Texas. Using a common sense and value added approach, we strive to incorporate these principles into our underwriting and closing processes.
As a direct lender, Bay Mountain Capital can close a loan within one day after receiving clear title and a complete file. The entire process generally takes two weeks, but may be accelerated when required.
We are an asset-based lender, which means that qualification requirements are limited. Our rates and fees are among the lowest in the industry.