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5 Most Common Mistakes to Avoid When Dealing With Private/Hard Money Lenders

August 3, 2016

1. Not getting pre-qualified.

It really boggles the mind when someone signs a contract without prior consultation and pre approval from a funding source. People often times put the cart before the horse. Before you start making offers on houses, get with your local private money lender and get pre-qualified. Even get yourself a proof of funds letter. That way you’re a “bona fide” cash buyer. Do you know how much better your deal offer looks when you can tell the seller that you’re an all CASH buyer and can back it up with a loan commitment from the lender? The difference is night and day and your offer moves to the front on the line regardless of whether if it was the highest offer. The best deals come to buyers from sellers who can move fast for one reason or another and want to close NOW!

2. Worrying about the interest rate.

Let’s face it, when you first hear the interest rates that Private/Hard money lenders charge for their services, thoughts of the mob and loan sharks are conjured up. How do they get away with charging such high rates? The fact is that the rates are not really that high considering the risk they take and the terms of the loan. The average investor loan is only 120 to 180 days to complete and sell. This is temporary parking at best. Lenders provide you with the bulk of the capital to make your investment deal work and often times some very good insight based on their experience while taking most of the risk. This is the cost of doing business and a small one at that, and it is fully tax deductible against capital gains.

Look at it this way. Think of it as access to easy high leverage low effort capital to fund your projects. It allows you to do the most important part of your job, which is to allow you to find and fund more below market houses. How many offers could or would you make if you never had to worry about your funding source?

I look at hard money lenders as co-advisors of your project and estimate of value. If they don’t think you got a good enough deal, they’re not going to lend you any money. What a good way to feel safe in your purchase, getting a “stamp of approval” by another experienced investor. Think about it? How much would you pay for advice to avoid losing $25k on a deal, because of something you missed that the lender noticed? We all understand that investing is not without risk, but the more “eyes” on the deal the better.

3. Not building a solid relationship with your local Private/Hard money lender.

Setting up and establishing a good rapport with your Private lender that knows the area and that can close quickly is absolutely vital. I cannot stress this enough. This is a relationship business where all interests must be aligned. A good local lender is paramount to your success. Some of the larger national companies that lend from far away take far too much time to efficiently process a loan request and are too unfamiliar with the local variances that each neighborhood offers to be effective, often times leading to delays and no funding at all in the end. Getting good deals in real estate is a fast action business and requires local boots on the ground. Plain and simple. While you still may need an appraisal for the file, most local private money lenders can just drive by a house and tell you yes or no upfront. That information and evaluation is invaluable in many ways, something a long distance lender (and you by extension) can be fooled by bad comps. Wouldn’t you rather have a local expert, willing to put their own money up, tell you if your deal looks viable or not?

4. Not asking about the prepayment penalty. Are there any?

This can cost you up to 5.00% in additional charges when you sell the property. Make sure you are familiar with all the costs, fees, and penalties (if any) before you proceed with a lender. We do NOT charge a pre-payment penalty fee in almost all cases

5. Not getting started right away.

Investing in real estate is an action oriented business and an excellent way if not the best way to build wealth and financial independence. Most people never start because they think they don’t have the money to buy a house or the wherewithal to ask for help and get partners and mentors to assist. Don’t let these thoughts hold you back

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