(312) 270-1618 What makes a good private or hard money lender?
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Post Outline
Responsiveness
Getting a real estate investment loan can often involve hurdles that all parties involved are unable to foresee. As such, it’s important to be able to communicate with your lender and receive prompt feedback and/or answers.
Oftentimes, the specific loan officer you’re working with will determine how responsive the lender is. However, some lenders have systems in place and a general culture that encourages faster, more accurate responses.
If you are speaking with fellow real estate investors about a specific lender, some good questions to ask to gauge responsiveness are,
- How easy is it to contact your lender by phone or by email?
- Does your lender respond quickly to your questions?
Flexibility
Lenders can vary quite a bit in their loan product flexibility. This flexibility can be seen across many of the most important lending variables;
- Cost (interest rate, points, fees)
- Leverage (LTC/LTV)
- Term length
And so on…
The flexibility that lenders can offer does tend to vary quite substantially by lender category. That is, banks will generally have less flexibility in their lending products than hard money lenders. However, even amongst a specific lender category, such as private lenders, there can be significant differences in flexibility.
This flexibility can be important when you start to consider the specifics of your project.
For example, let’s look at how the term length flexibility a lender offers can affect your loan.
Let’s say a lender only offers a 6-month loan term for their fix and flip loan product. However, due to the size of your hypothetical project, you anticipate that purchasing, renovating, and selling the property you’ve targeted will take closer to 9 months. Naturally, you ask the lender if they can change the loan term to 9 months instead of 6 months to better fit the project timeline. The lender responds that they’re either a) unable to do so or b) able to do so, but with significant cost through an extension fee. Now, instead of having a loan product which fits your specific project, you are left either having to rush through the project, or paying more for your loan.
A lender with great flexibility can offer you a loan product which better fits your specific project.
Time-to-fund
Private lenders can generally move quite a bit faster through the loan process than traditional capital sources, such as banks. However, even within the private lender category, there can be significant differences in time-to-fund.
Depending on the underwriting requirements of a lender, time-to-fund can vary considerably.
Among the factors that influence time-to-fund are;
- Appraisal requirements
- Other document/due diligence requirements
- Operational efficiency
Some lenders have less stringent appraisal requirements. For example, some lenders may only require a BPO instead of a full appraisal.
Due diligence checklists, of which appraisals are typically an important part, also vary in length. Some lenders require considerable documentation, while others require relatively few documents.
Lastly, operational efficiency can play a significant role in a lender’s time-to-fund. Some lenders process documents more quickly and have consistent underwriting guidelines, which can allow for both the efficient collection and review of the requisite documents.
Reliability in terms
It is not unusual for final loan terms to vary from preliminary loan terms, but the better the initial information collection processes of a lender and the tighter the underwriting guidelines, the more the preliminary loan terms tend to mirror the final loan terms.
Unfortunately, some lenders are not very good at initial information collection and underwriting, and as such can only be relied upon for very general ranges even when provided high quality data.
Some of the onus for this falls on the borrower; the more accurate data a borrower is able to provide initially, generally the more accurate the lender can be with their initial loan terms.
Regardless, high quality lenders will generally offer consistent, solid approximations of their final loan terms when provided solid data upfront.
Certainty of execution
Lenders back out immediately prior to closing for a number of reasons, but the best lenders can be relied upon to close on the agreed upon date.
Lenders who can be relied upon to close are generally thorough in their underwriting process, and have a good idea of past issues that have caused them to back out of deals.
Lenders who are more whimsical tend to be less reliable come closing time, often throwing up issues that should’ve been taken care of well before the closing table, and could have been resolved much earlier in the loan process with a more standardized approach.
Being able to rely upon your lender makes it far easier to increase the quantity of deals you’re able to do.
Conclusion
In sum, there are a number of factors which can make a good private or hard money lender. These factors include, but are not limited to; responsiveness (how quickly the lender gets back to you), flexibility (how accommodating the lender can be to your project), time-to-fund (how quickly the lender can move through the financing process), reliability in terms (how close ultimate terms are to preliminary terms), and certainty of execution (how certain you are of closing).
Do you need financing for an upcoming real estate investment project?
If so, you can fill out our preliminary application at this link to get started.