Couple Hard Money Tips · Don't Buy Real Estate

Nov '24 (edited) • Fix n' Flip

Couple Hard Money Tips

When you’re chatting with a hard money lender, you’ll want to go beyond just asking about rates and points. This is what I’d ask on the first call:

1. Are They Truly Direct?

Are you a direct lender, or do you have to go through a third party? Some lenders say they’re direct but still need third-party approval to resell the loan, which can add delays and limit flexibility.

2. Experience Requirements

What level of experience do you need, and what do they count as experience? Some lenders consider a “completed project” to mean a property you’ve rehabbed and then either sold or refinanced. Get clear on their experience requirements.

3. Minimum Credit Score

What’s the minimum credit score they need? Knowing their credit score expectations up front is always helpful. If your score is lower than average expect the LTV's to drop accordingly.

4. Loan-to-Value (LTV) and After Repair Value (ARV) Caps

What’s the cap on the After Repair Value (ARV)? Some lenders advertise 90% LTV, but if the combined purchase and rehab costs go beyond the ARV cap, you might need to bring in more cash to keep the loan within limits.

5. How Does the Draw Process Work?

What’s the process to pull funds for rehab, and how long does it take to get reimbursed? A quick, easy draw process can make a big difference in staying on schedule.

6. Loan Term and Extension Fees

How long is the term, and what do extension fees look like? Some lenders offer shorter terms, like six months, which could lead to extension fees stacking up if you hit any delays.

7. Prepayment Penalties

Is there a penalty for paying off the loan early? Look out for phrases like “minimum interest collected” instead of “prepayment penalty,” as it may mean you’re paying a certain amount of interest no matter how early you pay off the loan.

8. All the Extra Fees

What are your draw fees, processing fees, and other random charges? Ask about anything that might come up beyond just the rate and points. Extra fees for draws, legal stuff, or processing can really add up, so it’s good to get the full picture.

I just reviewed a term sheet from another lender with a 9-month term that requires 9 months of reserves for the liquidity requirement. Be sure to ask about these types of requirements so you’re prepared to cover them if needed.

These questions should help you get a feel for what the lender’s all about and see if they’re the right fit for your project.

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