A cacophony of less-than-desirable international events – coupled with an often volatile Wall Street – have caused an alarming shortage of capital that is needed to finance sizable and minute real estate transactions alike. Even though these market conditions have impacted capital at an institutional level, borrowers have begun seeking capital from privately raised, privately administered capital from hard money lenders, or professionals who specialize in the distribution of private funds.
Although it was once seen as impossible to finance a large real estate transaction with the help of a hard money lender, that assumption couldn’t be further from the truth – many lenders can service loans of less than $1 million to over $100 million, although the loan amount and conditions vary greatly on the lender in question. Perhaps greater in scope than the mere loan amount, however, are the types of projects that can be funded by a hard money lender – new constructions, multifamily units, and refinancing loans, for example, are all within the wheelhouse of lenders who specialize in hard money lending.
As with any loan-seeking process, there are tips and tricks to keep in mind when dealing with a hard money lender; although some of these ‘do’s and don’ts’ may seem trivial or mundane, following these guidelines will help your loan process run smoothly and efficiently.
1. Show vacancy information clearly. If you operate under the assumption that there will be no requirement for a management fee because the project is self-managed, that assumption will only lead to confusion; vacancy information should be shown to any prospective lender, along with management fees, reserves for replacement, etc. In the event of a default, your lender will most likely call on a professional management firm, and the cash flow must allow for this contingency.
2. Describe the transaction type. Although this may seem like common sense, the over-arching umbrella of transaction type includes: the type of real estate development and its location, equity availability and the terms of the loan, exit strategies, and any types of debt that exist for the property.
3. Include supplemental materials. Even though the phrase “a picture is worth 1,000 words” is incredibly trite, this phrase can come in handy when attempting to secure a loan from a private money lender. Think about it – what is more effective when describing a property: a paragraph listing the number of bathrooms, square footage, etc., or photos highlighting the property’s features and surrounding area? These supplementals, however, are not limited to photos. Including a copy of the town’s votes on zoning, permits, and other approvals can help paint a more cohesive picture of the area a property lies in.
4. Demonstrate market viability. Relying on industry reports alone only goes so far: although these market studies can be a piece of the puzzle, they rarely give lenders all of the information they need. Including pre-leasing and pre-sales reports can help bolster the marketability of the project you are trying to develop.
5. Don’t expect operating capital. Expecting a lender to dole out operating capital can be a dangerous mindset to fall into. One of the best ways to demonstrate your capabilities as a developer and operator is to invest your own capital into the project, underwriting start-up expenses. Think about it this way: unless your lender is also your business partner, why should you be loaned the start-up capital for your own business? This mindset also applies to the sheer amount of financing you will receive from a lender ¬– DON’T expect you will receive 100 percent financing. Ever.
6. Don’t expect to capitalize off of a ‘steal.’ From the lender’s perspective, the price you paid for a property in an arms’-length transaction is the market value. Although you may be proud of yourself for the purchase price (which may be substantially less than the appraised value), you should not expect a lender to accept the difference between the price you actually paid and the appraised value (if higher) as your share of equity.
7. Don’t cut corners on background research. Although ‘going with your gut’ may have worked for you in the past, securing a large loan from an accredited lender requires research. This research may seem monotonous and downright boring at times, but you will thank yourself in the long-run. Look into the lender’s interests, expertise, qualifications, references, and experience. Doing this before-hand will save numerous headaches down the road, whether you decide to go with a different lender or their ‘expertise’ isn’t what it’s cracked up to be.