Don’t Get Burned By Commercial Hard Money Lenders!
Category : Commercial Loans , Hard Money Loans , Real Estate Loans
There might come a time in your investing career that you will need to use commercial hard money lenders. Hard money is used when you need to get quick short-term financing. The rates are usually high and the LTV’s very low (to account for the risk involved in these types of loans). These loans are usually tied directly to the property value (however, lenders also look at the borrower’s credit history, personal financial statement, etc–they use this information on determine your rates and allowable LTV). Some people are scared to even think about getting a hard money loan because the rates are so high– but that shouldn’t stop you if the numbers make sense.
The commercial hard money industry is full of reputable lenders as well as sharks. And it would surprise you to find out who the sharks are! They are the ones with all of the slick advertising that promise you everything but never deliver (but they do manage to keep a nice chunk of your money!).
I have heard a lot of horror stories, from not closing on time to losing hundreds of thousands of dollars.
So how do you avoid being a casualty on this battlefield of commercial hard money lenders? Read on and I will share with you tips from past clients as well as my own personal experience.
PITFALL #1 – Not Using a Commercial Mortgage Broker
So you think you will save yourself some money by not using a commercial mortgage broker, but trust me, you will spend more in the long run. The broker is the expert you need to rely on. Not only will they know different sources of funding but they will also know which ones to avoid. Brokers also have a fiduciary responsibility to act in your best interest, so they should understand the process and know the lender. Typically, brokers will charge you 2 points to broker the loan.
PITFALL #2 – Not Having a Lawyer Review Your Documents
A Broker has a fiduciary responsibility to act in your best interest but they are not an attorney. Before you sign any contracts and pay any money to the lender, have your attorney review the documents. Most lawyers will review contracts for a small fee (depending on how large the contract is) and it will be worth your investment. Not only do you want your lawyer to review the documents, but also have them explain them to you in “plain english”.
PITFALL #3 – Paying Too Much Money Up Front
You can expect to pay some initial up front money (for appraisals or other inspections), but it shouldn’t be an exorbitant amount. Also, you need to know if the money is refundable or not and under what circumstances. Do you have to pay for site visits (other than appraisal)? Is any part of that refunded if the loan doesn’t close? This is usually where most of the heartache comes from…you have given them a large sum of money and it turns out that it isn’t refundable!
PITFALL #4 – Not Performing a Background Check On the Lender
Once you know who the commercial hard money lender is (if you’re using a broker, they won’t tell you that until you have signed a fee agreement) check the state that they are licensed in for any complaints or lawsuits. Most people do this step after they’ve lost their money and they are preparing a lawsuit! I suggest you do it before any money changes hands.
Using commercial hard money can be a beneficial solution to your investment strategy, but you want to make sure that you know what you’re getting yourself into, so that you don’t get burned.