I was recently consulting (actually I was consoling)with a real estate investor who just closed on a property using a hard money loan and realized at closing how much that loan had cost him in both hard costs and loss of cash flow.
If you’re thinking of using a Hard Money Lender (HML), realize that they are not all created equal. They have different rates and different terms. It is up to you to contact enough HMLs to find the one offering the best rates and terms for you.
I recommend contacting 15-20 or more until you have at least 3 that meet your needs. That way, when you have a deal, you’re sure you can get it funded easily and affordably. Don’t find yourself in the same shoes as this investor I “consoled”.
Interview as many HMLs as you can find and get answers to the following questions. Then compare the responses and select the best HMLs for you.
- What Interest Rates do they charge?
- What Points are charged?
- Are the points wrapped into the loan? In other words, will they loan the points?
- What LTV ratio are they willing to loan? What % of Purchase Price and of the Rehab cost will they loan?
- Is the LTV based on the After Repair Value [ARV] as opposed to current market value or Purchase Price?
- What is their length of loans? (prefer 1 year)
- Do they charge a Pre-payment penalty?
- What is their repair escrow release process? Fees for each release?
- Do they require you to have money in the deal? If so, how much?
- Do they require you to have an interest reserve (money they hold in escrow to cover your payments)? If so, how much reserve do they require?
- Can you place additional mortgages on the property? (Think Private Lender loans)
- How long does it take to close?
- What is the loan approval process?
- What is their loan approval criteria?
- How long does it take to get approval?
- Do you need to / can you get pre-approved?
If you are willing to do your homework up front you’ll save big money on the back end.
Expect abundance,
Lou Castillo
