5 Things To Look For In A Private Money Lender
By Paul Esajian on August 3, 2018
There are more hard and private money lenders than ever before. Over the past decade there has been a tremendous surge in interest and demand for real estate. What makes real estate investing so great it that you do not need to be directly involved to profit. There are many investors who strictly lend money without getting their hands dirty. These hard and private money lenders are easy to find in almost every market, often without much effort. With the abundance of alternative lending you may be able to be selective in who you work with. Instead of simply committing to the first lender you talk to, you can find someone with the best terms and fit for you. Here are five important things to look for in a hard or private money lender.
- Capital availability. The goal of working with a non-traditional lender should be to develop a long-term relationship. Even though 99% of the time you will only work on one deal at a time, you want to establish a working relationship for the future. It is important that your hard or private money lender has the capital you need when a deal becomes available. Ask if the current deal is a one-off transaction or something they want to get involved in moving forward long term. If they cannot commit to growing together you should consider working with someone else, if everything else is equal. With capital behind you, you can feel confident looking for new opportunities knowing you can strike if something presents itself. This doesn’t mean you have an open checkbook, but you can discuss the property if it makes sense for everyone.
- Upfront with terms. There should be no mystery on what you are walking into with a new lender. Your relationship needs to be built on trust and a mutual goal. If your lender is hesitant to provide terms, numbers and fees it is a giant red flag that you should look elsewhere. Some of the best hard money lenders are upfront with whatever fees they charge because they know they can justify it. Fees are always important but not the most important criteria you should look for. You can always make the fees back by making more profit and closing more deals. However, if the lender is dancing around fees, you can bet there will be something else unexpected down the road. When you fall into a bait and switch you will regret you didn’t choose the right lender instead of the most convenient. You can live with the terms if you know exactly what you are getting. Don’t wait until the closing to find out you are paying more than you thought. Always find out everything about the transaction before you commit to anything.
- No prepayment penalty. One of the only terms that could be a potential deal breaker is a prepayment penalty. This does not apply to every situation, but in the right scenario you may need to walk away. As the name indicates a pre-payment penalty is a penalty for paying your loan off early. Even though most lenders want their money back in a timely manner, they also want to get a return on their investment. If you think you are going to use the money for shorter than the prepayment term you need to weigh the cost versus the benefit. The penalty could be a few percentage points of the loan amount, which could equal thousands of extra dollars to the repayment. On the other end of the spectrum there may be a penalty for not repaying within a certain period. If you don’t pay within say six months there could be fees every month the loan is not repaid. Whatever you do, you need to know if there are any fees for paying early or extending the term.
- Common goals. As we stated, it is essential that you are on the same page before you get too far. Where many relationships get in trouble is by jumping into a commitment with limited discussions. You need to get every scenario, exit strategy, fee and potential change on the table right from the start. You don’t want to be asking questions or arguing about numbers after you take ownership of the property. Not only will that damage the relationship, but you won’t be as focused on the property as you need to be. If you have any questions it is ok to ask. Don’t be that person who waits until an issue pops up to address it. Even if you disagree you can have it out before you are deep into the transaction. If you are not on the same page with the property you should look for a different partner.
- Non-micromanager. If you have experience house flipping, you don’t need someone telling you what to do every step of the way. It is ok to hear input and opinions, but you don’t want your financial partner interfering with the property. Just because they watch home flipping shows on TV doesn’t mean they know what is best. As much as you want the capital if they are going to make unannounced visits to the property or butt in with your team, you should find someone else. They have every right to voice their opinion, but they should also know where to draw the line.
The right hard or private money lender will give you access to more deals than you could imagine. If you are looking for capital take your time and make sure you ask the right questions.