How many times have you looked at a real estate deal and it made sense on paper but then you discovered something that turned the deal sour? A couple of years ago I did a blog post on a survey of a list of hard money lenders in the industry. The results of the survey were pretty interesting for both real estate investors and hard money lenders.
For real estate investors who use hard money loans to finance their investment purchases, from time to time they are turned down for a loan. In some of these circumstances, a lender may decline a loan on an investment property even though the real estate deal makes sense on paper. But why?
Essentially the top 3 reasons that a hard money lender may decline to lend on a real estate investment property include:
1. High Crime Neighborhoods: If your property is located in a high crime or extremely distressed area. Sometimes this is where the good rehab properties are found, but if most of the houses in the neighborhood are all boarded up, most hard money lenders will pass on the loan.
2. Rural Location: The property is located outside of a major metropolitan area in a rural location where there are no sold comparables within 2 miles of the subject property. Hard money and private money lenders prefer to lend in major metropolitan areas over rural locations. Although a real estate deal in a rural area may look good on paper, if there aren’t sold comps nearby to support value, a hard money lender may turn it down. Also, smaller market, smaller pool of buyers. There are exceptions of course.
3. Low Cash Reserves: Real estate investors who are strapped too tight for cash may also be turned down for a loan. Cash reserves are not verified by all hard money lenders but some lenders will require bank statements.