How to know if you are working with a reputable hard money lender.
For real estate investors searching the internet for hard money lenders to fund their deals, it is often difficult to separate the reputable private lenders from the ones with questionable backgrounds and tactics (or are not even direct lenders at all). At the same time, many investors base their research entirely on the cost of the financing instead of analyzing the true differences between firms. The cost of doing business with a hard money lender is more than just interest rates and points – the right lending partner can be influential in helping you turn a profit and scale your business.
To help investors identify the right hard money lending partner for their business, there are a few questions that should always be asked.
What range of rates are offered by the hard money lender?
We’ll get this out of the way first, since it is often one of the first questions real estate investors ask a hard money lender the first time they speak. It is common for hard money lenders to charge an annual interest rate, with interest-only payments per month, and points paid at closing. In the current market conditions, qualified investors may find lenders offering interest rates ranging anywhere from 9%-15% with 1-6 points (see our rates here).
It is important keep in mind that a good hard money lender is about more than just rates and points, and slight differences in these costs can often be offset by added value elsewhere.
How quickly does your hard money lender work?
In the fix and flip business, how quickly your lender operates can make or break your deal. Whenever distressed properties are in the mix and an investor is trying to acquire their next property at the right price, being able to secure funding and a proof of funds without delay is of the utmost importance. ABL has closed loans in as quickly as 2 days, and averages only 10.
The need for speed applies to more than just the closing process. Time sensitivity is important at many instances throughout the deal, such as scheduling inspections, wiring funds for draws, and generating payoff requests.
What about pre-payment penalties?
The speed with which you can complete your project is just as important as the speed that your hard money lender operates at. Depending on your level of experience flipping or building houses, you may not need the full 12 months of the loan term to complete the project and payoff your loan. Most reputable hard money lenders appreciate borrowers that can complete the project on time (or early) and will not charge any fees or penalties if you decide to payoff early.
Is your hard money lender transparent with their fees and underwriting?
For an investor, having a hard money lender hit them with hidden fees or last-second changes in the loan terms can be extremely disruptive. A reputable hard money lender is completely transparent from the start about any fees the investor is responsible for, what the terms of the loan being negotiated are, and what circumstances might cause them to change.
At ABL, before any fees are paid to us, a Loan Terms Summary is generated. This document contains all of the costs involved in the loan, as well as a breakdown of the loan terms that both parties have agreed on. If a hard money lender refuses to operate in a similarly transparent manner, it could be an indication that they are noncommittal or preparing to change the terms down the line.
Does your lender care if you make money?
The unfortunate truth is that not every deal is a winner, and the right hard money lending partner should care about you making money – not just them. Your lender’s Loan Officers and Underwriters should be honest with you about the profitability of a deal and the likelihood of your coming away in the black. We’ve taken it a step further, and built a hard money loan calculator to help our borrowers estimate and visualize the true profitability of a deal before they take the risk.
At Asset Based Lending, we firmly believe that operating in a professional and transparent manner is essential to building a long term relationship with our borrowers and solidifying ourselves as one of the premier hard money lenders in the region. We invite you to learn more about our lending process, as well as hear what some of our previous borrowers have to say.
Or, if you have a deal that you’re ready to discuss with us, we’d love to help you fund it.