How to Select a Hard Money Lender
Hard money loans (aka private money loans or bridge loans), are generally used by real estate investors who are unable to obtain financing from a traditional lending source such as a bank or credit union.
Most Hard money lenders are either individuals or private companies who are not highly concerned with a borrower's credit score or employment history, but rather the loan to value ratio of the underlying asset being used as collateral.
Usually, private money loans are for a short duration (6-60 months) and can be advantageous to borrowers since they can be funded in a matter of days, unlike conventional bank loans which can take a month or longer to finance.
Great deals don't last long. An offer on a property using a hard money loan is viewed similarly to an all cash offer and can help set a buyers offer apart from the other bidders.
Even real estate investors with superb credit sometimes require a private money loan to purchase a screaming deal.
Regardless of a real estate investor's purpose for needing a hard money loan, below we will discuss where hard money lenders can be found and common scams to watch out for.
Where to Find a Hard Money Lender
- Google Search
Entering "hard money lender" + your city or state should return a substantial number of search results. Be sure to read Google reviews to see what other customers have to say about a lender and how they conduct business. Be cautious if a lender has all 5 star reviews, as these reviews potentially could be fake.
- Directory Sites
A website like Moolahlist provides borrowers with a list of local and nationwide hard money lenders, all of whom are licensed and verified. This site allows a borrower to enter a specific deal they need funding for and in a matter of seconds they will be matched with a hard money lender who fits their loan criteria.
For example, a borrower who needs a ground-up construction loan for a hotel in Arizona will be able to select from a pool of lenders who finance this type of project. Using a site like this will help you avoid scams, as well as save you time and money.
- Network
Your real estate broker, mortgage broker or lawyer may be able to refer you to a reputable private money lender they have successfully used in the past. Many real estate professionals have extensive knowledge and experience which could help you avoid the dishonest lenders in the hard money industry.
Common Hard Money Loan Scams
Like anything in life, hard money loans come with positives and negatives. Since these loans are less regulated than traditional bank loans, it’s advisable for borrowers to be on their toes for any suspicious games fictitious lenders might try to play.
Here are three particularly common scams used by unscrupulous lenders to be cautious of.
Upfront Fees
Contrary to some real estate investor’s beliefs, some upfront fees may be required to secure funding from a hard money lender. The three most ordinary upfront fees a borrower may need to pay are an appraisal fee, a credit report fee and an underwriting fee.
It’s when a lender asks for origination points to be paid prior to funding when the red flag should go up. An origination fee is how a lender is paid for their services. This fee usually ranges between one to five points, with each point representing 1 percent of the total loan value.
Borrowers should never pay a lender’s origination fee before receiving a hard money loan. For example, a scammer may ask you to pay a $5,000 origination or application fee before they release a $500,000 loan to you. If faced with such a request, move onto the next lender.
Bait and Switch
Under this scam scenario, lenders lure in borrowers by advertising falsely low interest rates. Once the borrower has committed a substantial amount of time and energy into the deal, the lender will change the terms of the loan just before funding is set to take place. Oftentimes this will place the borrower in a bind so be sure to get everything in writing and to read the fine print.
Unicorn Deal
If something seems too good to be true, it generally is. Lenders offering first time borrowers a 100% LTV on loan amounts up to $5 million should seem suspicious. Also, if a lender does not require any form of collateral to secure the loan, this should sound alarm bells.
Conclusion
Bear in mind, if for some reason the borrower fails to make the monthly interest payments, the lender will foreclose on the property and sell it to recoup their investment. Therefore, if you do assume a hard money loan, be sure you have a way to make the monthly payments and an exit strategy from the loan.
Remember, these loans have higher interest rates than conventional bank loans and are not meant to be held for the long-term. The most common exit strategy for a hard money borrower is to either refinance into a traditional bank loan or to sell the property.
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