In "Rich Dad, Poor Dad," Robert Kiyosaki talks a lot about the lack of basic financial education in our school system. Likewise, there is no school that teachers borrowers how to manage their funding, set realistic timelines or chose a competent lender. Borrowers generally face an uphill battle because of their lack of knowledge in this arena. Once a borrower is prepared to accept hard money terms, they should have realistic timelines and expectations. It goes without saying that you had to already consider the associated costs and the projected upside, but make sure the financing helps you accomplish your main objective.
I have seen many deals cross my desk (a few of them more than once) that do not fund because the borrower makes a critical mistake. After working on this unique funding solution for close to seven years I have come up with seven secrets that will help you become a successful Hard Money borrower. In order to fund your deal, you need to:
1. Be realistic in your expectations: Do not expect conventional rates or fees if you have a sub par credit score or if you have a debt-service coverage ratio of 30 percent. With the credit markets tightening today, be prepared for 5-8 points and 12-17% interest.
2. Provide accurate information: If the property was bought two years ago as a non-performing asset for $ 525,000 do not try to hide that fact. In the end the lender will always recover each rock during the due diligence period, so be up front on every detail. The best method is to make sure that you can document every claim you make in the loan package.
3. Do not carpet bomb the deal: I can not tell you how many deals where I have had multiple brokers approach me at the same time. The surest way to kill your deal is to have more than one broker working on it at the same time.
4. Think in terms of "As Is" Value: If you have an MAI appraisal completed, always reference the "As Is" value. Do not submit a request that is out of line with reality. For example, let's assume you are looking to purchase a non-performing apartment building. Market rents are currently $ 500 per month for each unit, but you are basing your numbers off of $ 1,000 per month for each unit. The details of this deal simply do not add up and are unsound because there is usually not such a large discrepancy in rental amounts.
5. Be Prepared: In order to get your project funded there is usually a lists of items that your broker will ask you to complete. Make sure you get this to your lender as soon as possible. Lenders are not happy if they have to ask you twice.
6. Make everyone involved aware of timelines: If there are deadlines in which certain benchmarks need to be hit, make sure you make everyone aware of this upfront. However, be careful not to use this as your trump card. If you are continuing bringing up new dates the lender will quickly lose interest.
7. Be aware of the process: Have your lender / broker fully explain the loan process to you. Make sure they make you aware of: documentation requirements, up front due diligence fees, site inspections, valuation method, points, fees, etc …. To protect yourself against any last minute surprises make sure you understand the associated costs and time required for each one of these steps.
If you follow the advice in these seven secrets you will be well ahead of your competition in getting your hard money loan funded. Most importantly, make sure that you are courteous and respectful with your hard money lender. The commercial finance world is very small and good relationships go a long way. Not only will they be a great resource to help you make money on your projects, but can also be a good source of leads for potential investment opportunities. By aligning yourself with the right individuals, having the right expectations and being prepared you will be well on your way to getting your Hard Money deal funded. To your Success!