Are you asking the right questions to your hard money lender?

When an investor contacts us typically the first question is "what is your interest rate"?  However, you need to dig and ask more so when you arrive at the closing you are not surprised as you sign the papers to buy your next deal.  Here are some questions to help you decide to choose the right hard money lender for you. 

1)  How does your process work?  

Ask this to let the lender explain how they underwrite and approve a loan.  This will also prompt you to ask some other questions.    The benefit of using a hard-money lender is to speed up the transaction and to get to the closing table with less hassle.   If their requirements for you are similar to the small community banks, there is not much value in using that hard-money lender. 

2)  What is your background and experience? 

This answer will give you a good idea if you will want to do business with this person.   You might also figure out if they will follow thru and do what they say.   Listen for their background that is similar to yours or if you have other interests in common.  

3) Is an appraisal required and how many days does it take to get a "clear to close"? 

This is a two-part question because if an appraisal is required that will often dictate how long it takes to get a clear to close and fund the deal.   Appraisals can take 2-3 weeks, cost a few hundred dollars and can cause stress with the seller.   Find a hard-money lender that has the experience of the market and can research property values in-house.  This will save you time and money. 

4) Is there a pre-payment penalty? What other fees are there? 

This is another two-part question because it reveals hidden surprises that you might not be told until you see the settlement statement or loan documents.   Some lenders might entice you with a low-interest rate because they know that is what most people ask 1st (See above).  However,  a pre-payment penalty and several small fees can add up so that lower interest rate does not seem so great once you do the actual math.   Find a lender that keeps it simple with no extra closing fees.  The interest rate might be higher and have some loan points but you will know your true costs and that helps you evaluate deals quicker.  

5) Is the interest charged simple or compounded interest?  

This is another way some lenders might entice you with a low rate or not be upfront with you.  The difference on how it is charged can be very costly to you and your profit margin. Let's do some math. What is the actual cost of a loan of $100,000 at 12% compounded daily for 1 year?  The answer is $12,747. What is the cost of a loan of $100,000 at 12% simple interest for 1 year?  The answer is $12,000. 

Simply put, choose a lender that charges simple interest. 

6) Do you lend for construction costs and how does this process work to pay for renovations? 

Some hard money lenders only lend on the purchase of a property and you need to fund the construction cost for improvements.   This is easier for the lender to manage but more money out of your pocket which can make it difficult to grow your business.   Find a hard money lender that also funds construction.   Understanding the process on how they distribute draws will help you manage your project and the expectations of your contractors.   

Remember, most of running a successful real estate business is establishing relationships.   If you ask the right questions on the front end and you build trust between you and your lender, you will be able to work together to close the transaction on-time,  finish your project faster, save on your holding costs, thus increasing your profit margin.