These Questions Will Help You Avoid Making A Huge Mistake
If you are considering a Hard Money Loan in Tacoma Washington, these are the 7 questions you must ask & answer before you take your next step:
- What is the potential benefit of the opportunity that requires a hard money loan?
- Can you qualify for a bank loan?
- Do you need to close quickly?
- Do you have at least 3 exit strategies?
- What happens if you default on the hard money loan?
- How long do you need the hard money loan?
- What’s the total amount of the hard money loan you need to borrow?
What is the potential benefit of the opportunity that requires a hard money loan?
Are you looking to fix and flip, build a spec house, acquire a new building; these are just a few reasons you could be considering borrowing a hard money loan, but before you do take time to fully understand what is the “best case scenario” outcome so that you can clearly evaluate that result verse the time, effort and cost of realizing the benefit of the opportunity.
- Insider hint: this is the question that most the pros call “the litmus test” or “the smell test.” If the potential result does not match your specific target goal regardless if it’s still positive it may not be the right deal for you.
Can you qualify for a bank loan?
You might be asking “What percent are most hard money lenders lending at?” This is a good question and starts with understanding if you can qualify for a bank loan, which will always be your best chance at the lowest rate regardless if you are borrowing from a bank or credit union.
As a local Hard Money lender, I always advise my clients that if they can qualify for a bank loan and they have the time to go through the banks qualifying process (which can take months in some situations) that may be their best option. Often, however, time is of the essence, or the bank’s qualification standards are simply too high. Thus a private/hard money loan becomes the next best option.
The percent/rate and fees for most hard money lenders will vary from state to state and region to region and even situation to situation. You can count on one thing for sure, a private money or hard money loan will be more expensive than a bank loan.
Which may lead you to ask, “Why do hard money loans have such high interest rates?” and the answer is, private lenders need to offset the risk of lending capital to a borrower based on a lower qualification standard, which is good news for the borrower who was turned down by the bank with a higher qualification requirement.
Do you need to close quickly?
One of the major benefits or pros of hard money loans is the speed at which they can close. So, if you are asking What are the pros of hard money loans? Or, what is the best way to use a hard money loan? The answer can be found in understanding how quickly you need to close your transaction.
We have many clients who can get approved for millions of dollars in bank loans. However, they choose or elect to use hard money in a situation where they need to close fast. Speed to closing can be a major “selling point” in motivating a seller to accept your offer over others so if you are asking “how do I get my offer accepted using hard money” be sure to highlight how quickly you can close.
Do you have at least 3 exit strategies?
Here’s an insider secret, the most experienced real estate investors know that “plan a” rarely works, so they evaluate a potential opportunity with at least 3 exit strategies in If you are just starting out and considering borrowing a hard money loan you may be thinking “what is the best way to use hard money” (I answer this in detail a future blog call “Top 5 best times to use hard money, plus a bonus…top 5 best times NOT to use hard money” ) in general, a hard money loan should be used to help you execute your plan and if your plan deviates you need to be prepared for exit strategy 2 or 3.
What happens if you default on the hard money loan?
Because hard money loans vary from state to state based on state and regional laws the answer to this question will depend on your locate laws. In general, the most common remedy for defaulting on a hard money loan is As a borrower of a hard money loan you need to be aware of the potential outcomes and again have your 3 exit strategies ready so that you don’t end up defaulting and suffering through a foreclosure.
One great question I have heard over the years is “Why are people called loan sharks instead of private money lenders?” In many respects, the answer to this can be the distinction as to what happens if you default on your loan. Traditionally, loan sharks are private lenders who operate in the shadows willing to lend money to just about anyone for any reason with no security. These types of lenders are few a far between and are more a thing of the past.
However, this topic brings up a great point for anyone who is considering a hard money loan or a private loan for real estate which is, I highly recommend you establish a level of trust with your lender. Trust is a two-way street which starts with the relationship with the private lender / hard money lender and runs all the way through the payoff of the loan.
How long do you need the hard money loan?
Length of time which you need to pay back the hard money loan is a critical element of a hard money loan. If you are “Flipping” a house be sure to calculate renovation time, marketing time and the time it will take to sell the finished A common mistake is only calculating the renovation time or simply not creating a realistic timeline which will result in more fees from the private/hard money lender at best and a foreclosure in the worst case.
The pros know to add a few extra months up front to give them extra time to pay the loan off. Most typical private loans are 6, 9 or 12 months. You may have heard the term pre-payment penalty or asked “What do hard money lenders mean by ‘no pre-payment penalty’” A pre-payment penalty sets the minimum amount of payments which will be made on a specific loan.
If there is no pre-payment penalty, you are free to pay the loan off as soon as you would like. *insider hint – even if you have a pre-payment penalty you can still pay off the loan when you want you simply have to pay the fee, which may be worth it depending on the situation.
What’s the total amount of the hard money loan you need to borrow?
One of the most common questions we answer is “Would a hard money lender lend me 100% of the money?” or another variation “What’s the maximum loan-to-value that a lender will loan on real estate loans? Both questions will depend on your hard money lender. Our Clients find it helpful that we can lend 100% LTV. We can do this by securing our loan against the subject property and against another property the borrower owns.
Bonus Question
Do you own any investment real estate?
When considering a hard money loan be sure to take an inventory of your resources. Think about cash on hand, the strength of your opportunity (you may have built in equity upon purchase) and other investment real estate you could use as collateral. Depending on your hard money lender these factors may play a part in their decision-making process.