Making Sure You Hard Money Loan Will Fund

Numerous hard money loans do not fund because borrowers do not know what to expect, they do not understand what a hard money loan is and have no clear exit strategy. In addition, because of the financial crisis and the shortage of available capital, underwriting criteria have been more demanding. Numerous loan applications are not complete enough to provide funders with the information needed to make a determination.

To successfully close loans it is important for the borrowers to understand what are the terms, conditions and costs of private money loans. These costs are going to be significantly higher than conventional loans both in terms of processing fees and origination. Hard money loan should be considered temporary thus no longer than 24 months, in some cases they can be extended for longer periods. We are seeing exceptions in these terms, because buyers of investment properties are getting them at low prices (REOs), some of our investors are willing to put together longer terms.

Exit strategy becomes more and more important, as we all need to make sure it is realist so that we can get back our capital. Borrowers’ in numerous cases need to understand that offering a make sense and clear exit strategy will provide them with an advantage. In some case it could be to refinance in another hard money especially in low loan to value loan. But this is something that needs to be thought through carefully. A lot of times when I receive a call and talk with brokers this is something that we spend time looking into. Most loans funded have reasonable exit strategy, the one that are not it is because neither the borrowers nor us can see the way out. Foreclosure is not an option anymore, as most of us are not interested in taking over properties. This works both for commercial and residential properties.

Information is the big reason for loan not to close. One of the problem is that borrower do not understand that they need to be accurate. In the case of hard money it is better to get more information than not enough. As funders of private notes we want to understand who the borrower are, their intention and if they are realistic. In numerous case deal do not close because the initial information provided was in accurate or because once the complete pictures has been established a loan does not make sense anymore. In other cases, the problem is that the information is not complete thus we cannot structure a loan in a way that is both acceptable to us and the borrower. When we have the information half of the time is too late.

There is money for hard money in today’s environment, so let’s funds those deals.

Fast Funding Reality or Fiction?

Everyday I am contacted because a borrower needs money rapidly. When I say rapidly, I mean within three to four days. While it would be nice to be able to deliver funds this fast in mosst cases it will not happen. For due diligence I contacted a number of other hard money lenders as an informal survey and all agreed that this was not feasible. As you can see I did not say impossible, but realisticaly not feasible.

Hard Money loans are not gambling money, they are loan securitized by colateral which is real estate. The securitization process requires to go through a number of steps. Taking these steps from identifying the property, putting together a loan solution, to recording the loan will take a number of days. In general it is difficult to fund a loan in less than 6 days on average.

As a perspective I have spoken with colleagues that have funded loans in four days. At the same time, I have spoken with colleagues that would not even look at packages unless they have at least 6 to 10 days. If a loan is needed rapidly then but can not be arranged there are a number of alternatives to be considered, from getting an extenssion on a purchase contract and foreclosure to negotiating with different creditors. In most cases this can be achieved succesfuly, only once in my experience this was not possible.