Private Lenders, also known as Hard Money Lenders, have become an important source of capital for many residential real estate investors. The fix and flip lenders used to be primarily for Borrowers with bad or no credit, however, now the lenders have gone mainstream with astute real estate investors looking to leverage their capital and increase their Return On Investment (ROI). In the past, smaller local banks were able to provide this niche financing for real estate investor industry but they still remain under intense regulation and government scrutiny from the banking crisis of 2008. Now the market place is loaded with financing options for the small to large investor to consider.
Experienced investors understand hard money is a great strategy for funding their investments but all investors should understand the positive attributes a good reputable lender should possess to make good business sense for you.
A good private lender should be looked at as a partner on the deal. They should be able to value the property AS-IS and subject to the proposed repairs, the After Repair Value (ARV) The Hard Money lender should also be able to reinforce the borrowers renovation budget. In many instances, the lender, has or currently renovates houses and is familiar with building costs, material costs, and timeframes of a renovation. At the end of the day, the lender should be trying to make a loan that doesn’t result in a foreclosure and should have a vested interest in your success, so lean on them for advice, input and Values.
Ever use a lender that promises to close in 10 days and when you let them know closing date has arrived they don’t answer their phone? I have, it’s not fun. A good private lender should be able to close a deal in 7-10 days. Sometimes a loan will require an appraisal which can slow the process down, but even an appraisal should only add three days at most. If your lender is advertising they are a direct private lender then they should be the ones underwriting, approving and funding the loan. We all know that Sellers does NOT like to extend closing dates so it is vital to a deal that on closing day your money is there.
Math That Works for You
Understand what you Investment goals are. Do you want to make a 30% return on your investment? If so get all of the fees from your private money lender at the time of your application and plug them into your spreadsheets to understand how borrowing costs will affect your returns. Remember, when you borrow money you are only investing a smaller piece of your capital so you need to analyze your returns off what your personal investment is. Lenders fees can include survey fee, appraisal fee, lender title insurance, loan origination fees, doc prep fees, inspection fees, and more….A good private lender will disclose all fees and be willing to have a conversation with you about them.
If you want to get a loan from someone off a handshake and a napkin as a mortgage note then you are entitled to that, but the private money business is a large industry. Your lender should have expertise in the mortgage industry. A good private money lender will have a license. You are legally required to be licensed through the NMLS. A good lender will carry business professional insurance for any errors that are made that could affect the status of your loan. Other important qualities are a professional web presence that offers online applications, professional marketing, and BBB ratings. All these attributes show that the lender is established and will be around when you need them.
Private Money lenders can move faster than banks, have less regulatory and institutional constraints than banks and provide expertise in the real estate industry that banks imply cannot provide which makes Private Money lenders a better solution for the real estate investor. Some Private money lenders offer the world but fail to deliver so below are a few questions you should ask when deciding on a private lender for your next transaction.
Are they a licensed lender? Lenders should be licensed, it’s required if you offer to make loans on real estate. If they aren’t licensed, do you want to work with someone who isn’t being honest on how they conduct their business?
Do they offer No Money Down loans? No money down loans sound like a great opportunity to the buyer, but this is how a lender will go bankrupt quickly. View these lenders with suspicion, especially if they are asking for money up front
Are their terms competitive? Ask around to other lenders, rates and fees can vary significantly. As stated above, all fees should be transparent.
Do they require Upfront Fees? If they do please run for the hills. I’ve dealt with many borrowers that paid upwards of $2,500 up front only to be turned down during the application process. The only fee that should be paid upfront is an appraisal fee, and that should be more the $350.
Capital Fundings is a direct private money real estate lender with years of experience in real estate investing. We promise to provide consistent and timely funding of your real estate investments, while offering an easy approval process, great service, great rates and terms. We will save you money and be a great partner in what we hope is a successful career of real estate investing.