Hard money lenders have a reputation of being able to do things banks cannot. The nature of their business allows lenders to overlook a lot of things. Yet that does not mean they freely give out their money with no regard for getting it back. Hard money lenders are just as concerned as banks about default. There are things that scare them.
Actium Partners is a hard money lender based in Salt Lake City, Utah. Much of their business relates to real estate transactions involving investors and developers. With their business model as a basis for this post, Actium says that there are five things guaranteed to scare any hard money lender:
1. Investment Seminar Graduates
Do you remember the real estate investment seminars of the 1980s and early 90s? While their numbers have dwindled, investors allegedly looking to help others make money in real estate still give their seminars and promise that anyone can get rich investing in property.
Hard money lenders tend to be wary of seminary graduates for the simple fact that they tend to have an unrealistic idea of what making money in real estate entails. They think it is going to be easy. They assume they will not have to invest a dime of their own money. They tend to think that every property is going to generate huge returns. It doesn’t work that way.
2. An Insufficient Down Payment
While there are a small number of hard money lenders willing to go up to 90% LTV, they are rare. It is even more rare to find a lender willing to fund an acquisition at 100%. As such, hard money lenders are usually scared away by borrowers who come to the table with an insufficient down payment. They just aren’t willing to assume a large amount of risk while simultaneously letting borrowers off the hook.
3. Insufficient Financial Resources
In addition to an insufficient down payment, hard money lenders are wary of borrowers who seem to lack sufficient financial resources to repay the loan on schedule. Lenders may not run thorough credit checks or look under every rock for financial information on borrowers, but they do expect borrowers to demonstrate the ability to repay. That borrowers would expect anything different is a bit surprising.
4. A Lack of Real Estate Experience
Hard money lenders are scared away by clients who attempt to borrow despite having little to no experience in real estate. From the lender’s perspective, real estate is an investment. But it is also an investment that can easily fail if investors don’t know what they are doing. A lack of experience only ups the risk for lenders.
Lenders do not necessarily expect investors to have dozens of properties under their belts. One or two past successes is reasonable. Trying to get a hard money loan on an investor’s very first property can be challenging.
5. A Willingness to Spend Too Much
Last but not least is a willingness by the investor to spend too much acquiring a property. Although hard money lenders are not real estate experts themselves, they are fairly adept at assessing the market. They know when a piece of property is priced too high. They also know that paying too much significantly jeopardizes the investor’s returns.
Hard money might be easier to obtain for real estate investments than conventional financing. Still, hard money lenders are not handing out cash like candy. They have to be very careful about what they do. If a borrower gives any reason to be scared by a deal, the smart hard money lender will walk away.