You found the perfect investment property and need to move quickly. It’s a hot property and you know that other investors will swoop in if you can’t make this deal happen quickly. You need a hard money loan. While a quick online search will give you a ton of options, here are 3 things to look for in hard money lenders in California to make your search more viable.
Hard Money Lending Specialties
To expedite the loan process, make it easy for the lender to approve you. This means taking your deal to the right hard money lender. While being a “hard money lender” is a niche in itself, within this lending segment, financers specialize in specific types of deals. While they might consider other deals, it will take more time because it is out of their realm of expertise.
Generally speaking, hard money lenders in California fall into one of three categories: fix-and-flip, rehab-to-rent, and commercial financing. While fix-and-flip and rehab-to-rent might seem like the same type of loan, the strategies behind it are different which is why lenders specialize in one more than the other.
Fix-and-flip is a short-term strategy and is considered a higher risk venture than a rehab-to-rent loan. Both consider and may even further specialize in single-family, multi-family, apartments, condos and distressed scenarios such as short-sales, foreclosures, and REOs. But the fix-and-flip will seek a faster exit strategy, often charge more and wants to see a clear outline of contractor work and market conditions.
Hard money loans don’t require the same credit applications as traditional financing, though you may still need to complete a credit history. However, you will need money to access the capital. Ask the lender what you need for the loan-to-value (LTV) and the after-repair-value (ARV). At the very least, you will need 10 percent down, usually 20 percent or more of the LTV. The ARV range starts at 75 percent but will increase depending on the deal and the experience of the borrower.
You also want to find out the point structure and closing costs which can add anywhere from another four to ten percent to the loan. Determine if there are prepayment penalties and the length of the loan term. Most fix-and-flip loans are structured for less than 12 months while commercial and rehab-to-rent are longer terms with the former extending as long as 30 years in some cases.
Understand the interest rate. These are not traditional banks and financing companies and you will pay a higher premium for the loan. Don’t be surprised when traditional lending is boasting 4 percent rates and your hard money loan comes in at 10 to 15 percent. This is the cost of doing business.
Decision Making Process
Once you know the basics of what you need and what the lender expects in terms, you will need to complete the application process. In some cases, hard money loans get approval within a 24 hour period and can fund in as little as three to five days.
To ensure you are on this expedited timeline, have your business proposal and loan application properly completed. A hard money loan application process is more like a business plan pitch to a partner or investor than it is asking for a loan. The lender will look at creditworthiness most likely to ensure you aren’t in foreclosure on other properties. The loan itself isn’t contingent on credit scores.
The lender will also want to see a detailed plan regarding the property, it’s plan for rehab and the current market conditions. All of this should outline how the property will generate a profit and in what timeframe. Have contractor estimates for the work and anticipated values of the property when the work is completed.
Something hard money lenders put a lot of weight on is your experience. They see deals all day long and know there is a lot of money to make, but why are you the guy who can complete this in the timeframe and for the margins proposed. Detail your past experience in investment properties, rehabs and professional experience you have as a contractor, real estate broker or investor.
Hard money lenders rarely do business with people who have no experience. If this is your first deal, it might be wise to get an experienced partner so you can develop the experience. Sure you’ll have to share the profit and will more than likely still do the majority of the work, but it allows you to develop a portfolio that will help you get financing on your own for the next deal.