It doesn’t seem wise to issue a loan to someone in foreclosure proceedings or someone desperate to refinance in order to get fast cash. However, it’s just run-of-the-mill for a hard money lender. These lenders understand that, from time to time, even good people wind up in bad situations and need a temporary fix to help them get out of the hole. For borrowers, a hard money lender’s benevolence could be a lifesaver – or it could spark the beginning of a painstaking downward spiral. Here are some tips for negotiating with a hard money lender to ensure you get a fair deal:
Deal with the boss. One of the advantages of a hard money loan is that a lot of lenders are small business operated by small team or a single investor. A stark contrasts the bureaucratic, analysis-paralysis underwriting process of a bank. A lot of times with a hard money lender, you can reach someone with the ability to make quick unilateral decisions in one or two phone calls.
Realize it’s a Risk Game. Hard money lenders are giving large putting up large amounts of money for deals of dubious quality. When you talk w/the decision maker give them as many reasons as possible why your deal is unique:
- Your experience
- Your team or resources
- Similar deals that turned out well
- A prospective buyer
Emphasize exit strategy. A hard money lender’s worse nightmare is a vacant property sitting on their balance sheets tying up their cash. Present a compelling case as to why, worst case scenario they can quickly sell this property if your deal fails.
Don’t expect low interest rates. You’ll probably be offered an interest rate in the ballpark of 12 to 18 percent. Certainly don’t sign up for anything over 20 percent. Run the calculation to see how much more you will be required to pay and ask yourself, “Is it really worth it? What other options do I have?”
Know your terms. Watch out for structures that seem like you can only fail — like interest-only or adjustable rate loans that increase dramatically after a set amount of time. Know precisely how much the loan will cost you. Sometimes individuals get tricked into paying on interest each month until the end of the loan term when the payment balloons suddenly, making it hard to fulfill the agreement.
Look for low points. Hard money lenders usually charge anywhere from 4-8 points. One point equals one percent of the mortgage amount. For example, 1 point on a $100,000 mortgage is $1,000. The lower the points, the less fees you pay. It’s not reasonable to expect 1 point (which is what a bank might give you), but try to stay below 5 if you can.
Seek a nonrecourse loan. With a recourse loan, a lender can not only take your home in the event of nonpayment, but the lender may also take legal action against you – resulting in wage garnishments or expensive court cases. Be sure you are taking out a nonrecourse loan, which says that the lender may take your property as collateral if you do not pay back your hard money loan, but may take no further action against you.
Find the right lender. Sure, you’re in dire need of cash and no one wants to give you any, but that doesn’t mean you should automatically sign up with the first hard money lender that comes your way. The only thing worse than negotiating a deal unprepared is negotiating a deal while desperate.. personal loan