So clearly your cost for cash is important. You would be foolish to award your business to a lender with higher than typical interest rates and origination points, but because hard money is short term, pricing shouldn’t be your primary motivation. Your primary concern should always be to get to closing; and, to get to closing as expediently as possible.
A denied loan in the eleventh hour leads to bad relationships, potentially lost deposit, and potentially lost revenue. Same results when there is a delayed closing. So how can you solve for denied loans and delayed closings? The first and most obvious answer is to supply your lender with the correct ARV and an accurate scope of work. If you throw gasoline on the ARV and dumb down the rehab scope in your pre-approval stage, there is a likelihood that you may not qualify for the loan, because the LTV ratio may jump over the lender’s prescribed ratio. So be honest. This way you won’t risk being denied and throwing away your loan application money. But if your loan is denied, you want to work with a lender where you can pick up a phone and have an owner explain why and suggest a way to solve the problem. Because this isn’t conforming lending, your hard money lender should have the ability to make atypical or non-conforming lending decisions.
In terms of delayed closings, for the purpose of this argument, we are going to assert that the title company and associated title insurance do not factor into the delay. So how do you avoid a delayed closing? The obvious answer is that you, as the borrower, need to provide your lender, title company, and builder risk insurer with every document necessary to facilitate a closing. If you’re anything like most real estate investors, running your back office can be a real weakness. Therefore, you should be working with a lender who supplies a checklist of items needed and a borrower dashboard to visit to verify that those items have been received. Your lender should share ownership over this process and act as your fail safe.
Secondary to getting to the settlement table, is working with a lender who can also add value to your business in ways that go beyond simply funding your deal. Some of these ways include cash flow management, rehabilitation consultation, vendor or contractor consultation, and investor networking.
Your hard money lender should offer a loan product that allows you to defer any payments until you go to closing on the way out. One of the biggest problems rehab investors have is the ebbs and flows of cash flow. Making monthly interest payments on a loan taxes cash flow. Also, waiting for draw fund disbursals taxes cash flow. You should be able to request a draw fund and have that money in your account in three days or less.
Your lender should be expert at understanding scope of work. If your lender is running their operation effectively, they should have a network of reliable appraisers who can not only correlate the scope of work to your project’s ARV, but also find weaknesses in it so that you can efficiently plan and execute your rehab.
Your lender should have ties to local vendors and contractors in your geographic area so that you have an additional resource for both materials and contractors. In essence, you need to work with a lender who has a preferred vendor list and a preferred contractor list. And equally important, those two lists need to constantly be updated so they are current.
Your lender should have ties to real estate investors in your property’s area. Why is this important? You may need to simply identify someone to assign a deal or to wholesale a property. Or, you may decide mid project that you want to cut bait. In those instances, you should have the support of an investor network to help.
The bottom line is that you should be dealing with a lender who sees you not as an individual loan taker, but as a client and business partner who, if need be, can avail themselves of a multitude of resources there to help support your business and allow you to realize your dreams.
