A hard money lender will never run out of fashion in spite of all the innovations in banking. Once in a while, people run into financial woes that their banks cannot sort as soon as they may need or their credit score does not just allow them to enjoy bank lending. When this happens, a hard money lender becomes the best option to work with.
Find a Borrower & Evaluate the Deal
You must have a way of reaching out to clients for your business. If you have enough money, go into advertising. If not, reach out to your investors and business people for leads on a deal you can fund. You have an upper hand if you belong to a local Real Investment Club. You can start pitching here. Talk to the club manager to allow you access to the members.
Size up the deal. Consider the money required and the collateral in question. Evaluate whether it makes financial sense to you.
Once you have discussed the collateral, determine the borrower’s equity in the property. A hard money lender should be looking for at least 30% of the equity as a rule. So the borrower should not borrow more than 70% of the property value after repair.
Assume the purchase price of the property is $100,000.
$10,000 in repairs
$185,000 after repair value
So to give the borrower $100
Loan for $100,000 = LTV (loan to value) of 67%
Assess Borrower’s Credit
While you have been chosen because the customer does not want to deal with formal bank credit red tape, this does not stop you from checking the borrower’s moral standing. Check the reputation when it comes to making business deals. Have they ever been declared bankrupt? Is the first private lending deal? Do they make timely payments?
Remember you are interested in the borrower’s reputation. As for credit history, you do not have to worry, you have the property.
Ask the borrower about their expectations. Hard money loans take a short period between 6 months or a year. Some borrowers though may opt for multi-year loans such as 3 or 5 years. In this case, ask them to refinance or pay off your note prompt.
Interest rates will vary based on the risks, market rates, and duration of the loan. Be conversant with your local rates. Consider offering a small discount until you become an established hard money lender.
At this point, the borrower should have handed over the necessary documents. Understand why they chose you. Get a list of repairs needed alongside an inspection report including a termite and oil tank inspection.
Get a professional appraiser to do After Repair Value appraisal. Inspect the property to see the repairs for yourself. Ask for repair bids. The borrower must get a title and home insurance with your names.
Close the Deal
If this is your first transaction, use an experienced lawyer. Go through the loan documents and wire the hard cash to an escrow agent. Ensure that the terms are well stipulated and all exemption clauses are captured.
There are a number of ways that you can use to service the loan. You can either opt for a simple-interest loan only or hire a servicing agent if it is a complex loan. “Do a thorough research on the method that allows you maximum returns from the lending or the property.”
Secret Success Tips for A Hard Money Lender
Hard money lending business was innovated for convenience and faster access to cash. The protection of the lender is in the property offered as collateral. It is really important to ensure the documentation is clean, the title is valid and insurance is valid. To succeed in the business, you need these tips to ensure you take advantage of every good deal that comes your way.
– Valuation of Collateral
– Borrowers Credit Valuation
– Proper documentation to ensure availability and authenticity of collateral such as insurance and private lender insurance
– Take Care of your Personal Wealth: do not put up everything up for borrowing.
Succeeding in this business is easy with good planning. Be careful about valuation and documentation. Ensure you stay liquid and do not jeopardize personal wealth while at it. If you need help on how to navigate the business, talk to us.
Mckenna, Francine. How can you monitor a borrower without financial statements? https://review.chicagobooth.edu/magazine/summer-2014/how-can-you-monitor-a-borrower-without-financial-statements