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The Art Of Being A Good Hard Money Borrower – Seven Secrets To Getting Your Hard Money Loan Funded

In “Rich Dad, Poor Dad,” Robert Kiyosaki talks a lot about the lack of basic financial education in our school system. Likewise, there is no school that teaches borrowers how to manage their funding, set realistic timelines or chose a competent lender. Borrowers generally face an uphill battle because of their lack of knowledge in this arena. Once a borrower is prepared to accept hard money terms, they should have realistic timelines and expectations. It goes without saying that you had to already consider the associated costs and the projected upside, but make sure the financing helps you accomplish your main objective.

I have seen many deals cross my desk (a few of them more than once) that don’t fund because the borrower makes a critical mistake. After working on this unique funding solution for close to seven years I have come up with seven secrets that will help you become a successful Hard Money borrower. In order to fund your deal, you need to:

1. Be realistic in your expectations: Don’t expect conventional rates or fees if you have a sub par credit score or if you have a debt-service coverage ratio of 30 percent. With the credit markets tightening today, be prepared for 5-8 points and 12-17% interest.

2. Provide accurate information: If the property was bought two years ago as a non-performing asset for $525,000 don’t try to hide that fact. In the end the lender will always uncover each rock during the due diligence period, so be up front on every detail. The best method is to make sure that you can document every claim you make in the loan package.

3. Don’t carpet bomb the deal: I can’t tell you how many deals where I have had multiple brokers approach me at the same time. The surest way to kill your deal is to have more than one broker working on it at the same time.

4. Think in terms of “As Is” Value: If you have an MAI appraisal completed, always reference the “As Is” value. Don’t submit a request that is out of line with reality. For example, let’s assume you are looking to purchase a non-performing apartment building. Market rents are currently $500 per month for each unit, but you are basing your numbers off of $1,000 per month for each unit. The details of this deal simply do not add up and are unsound because there is usually not such a large discrepancy in rental amounts.

5. Be Prepared: In order to get your project funded there is usually a lists of items that your broker will ask you to complete. Make sure you get this to your lender as soon as possible. Lenders are not happy if they have to ask you twice.

6. Make everyone involved aware of timelines: If there are deadlines in which certain benchmarks need to be hit, make sure you make everyone aware of this upfront. However, be cautious not to use this as your trump card. If you are continuously bringing up new dates the lender will quickly lose interest.

7. Be aware of the process: Have your lender/broker fully explain the loan process to you. Make sure they make you aware of: documentation requirements, up front due diligence fees, site inspections, valuation method, points, fees, etc….To protect yourself against any last minute surprises make sure you understand the associated costs and time required for each one of these steps.

If you follow the advice in these seven secrets you will be well ahead of your competition in getting your hard money loan funded. Most importantly, make sure that you are courteous and respectful with your hard money lender. The commercial finance world is very small and good relationships go a long way. Not only will they be a great resource to help you make money on your projects, but can also be a good source of leads for potential investment opportunities. By aligning yourself with the right individuals, having the right expectations and being prepared you will be well on your way to getting your Hard Money deal funded. To your Success!

The Pros and Cons of Hard Money Loan

Real estate investors are often confused by some real estate terms, especially the beginning investors. Many of them intend to increase their financing options and are curious about what “hard money loan” is. Hard money lenders are usually individuals or small groups that lend money based on the collateral, or your credit score. It is called hard because it’s generally harder to pay back. these loans are short term loan with higher interest rate and upfront fee. Many beginning investors think it is risky, when credit is tight; however, get access to funding is crucial for the success of the real estate investments. Let’s take a look of the pros and cons of the these loans.

The pros of the these loans:

More financing options: Hard money loan is one of the loan types even though there are a lot of differences between conventional loan and hard money loan. Hard money loan is easier to access, if you don’t meet the strict conventional loan term, it could be a good alternative. You can often close the transaction faster, with less paperwork than the conventional government loan.

More collateral options: Hard money lenders accept many types of collateral. You can use your own home as well as the future cash flows of the property as collateral. It allows you to borrow up to 75% of the value of the property. If you are short of funding, you cannot meet the minimum LTV ratio, you can also use other assets such as your own house, possessions, and retirement savings as collateral. Be careful and manage the risks properly as you may lose your other assets if anything bad happens.

More flexibility: Many savvy investors use hard-money loan to finance the repairs and renovations. You can close the transaction faster and set up a separate escrow account with a lender to pay for repairs and renovations.

The cons of these loans:

Higher cost and risk: Lenders generally require higher interest rate and upfront fees. These loans are mostly short term. Therefore, to meet the stricter loan terms, investors have to actively manage the risk of the investment. In the down market, investors encounter significant risk of unable to repay the loans and lose the collateral properties as well as other assets.

Lower ratios: Hard money loans are easy to access, but the loan-to-value rations are typical lower. In a conventional government loan program, you are able to borrow 80 to 90 percent of the value of the property while in the hard money loan; you can only borrow up to 75 percent.

With the right lender, the risks come from the property itself can be managed; with the wrong one the risks are high. There are many ads of the hard-money lenders in the newspaper nowadays, but it requires skills to identify a good lender. It is recommended you get help from a reputable broker and choose the lender carefully. You should make effort to prevent you from a fraudulent lender and losing up-front fees without getting a loan or ending up in foreclosure without appropriate reasons.

The 5C’s of Finance: Business Loans

When you go to a bank or financial lending institution there are 5 key things they will take into consideration before approving a loan. These “5 Cs” apply to both personal and business loans. Since the bank or lending institution are in business to make money, they take these 5 things very seriously and you will want to be prepared before applying for a business loan. The 5 C’s in no particular order are capital, collateral, conditions, character, and capacity. Here we will deal specifically how they apply to a business loan.

Capital is the money you personally have invested or will invest in the business. When applying for a business loan the prospective lender wants to see what kind of risk are you willing to make to see this business succeed. The more you personally have invested in the business the more likely you are to work your hardest to make sure the business is a success. If you are not willing or prepared to make a sizable financial investment in the company, more than likely the lender will not be willing to take a risk either. If your business is already operating you will be asked to provide personal and business records showing every detail of the business including tax records, accounts payable, and accounts receivable.

Collateral is personal and or business assets that you are willing to put up as security in the event the business cannot repay its loan. The bank wants to know there is a second source of repayment. Equipment, buildings, accounts receivable, and in some cases, inventory is considered possible sources of repayment of the business loan, anything the bank can sell for cash. Both business and personal assets can be sources of collateral for a business loan. Collateral should not be confused with a guarantee. A guarantee is when someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require both collateral and a guarantee as security for a business loan.

Conditions refer to the purpose of the business loan. Will the money be used for working capital, additional equipment, or inventory? Other conditions the lender will consider are the economy and conditions not only within your business but also in businesses that could affect your business (your suppliers and or service companies included).

Character is the impression you make on the potential lender. The lender determines whether or not you can be trusted to repay the business loan if granted. Some of the things the lender might ask for are your educational background, your experience in business and in your industry. More than likely they will request references for you and the background and experience of your employees may also be considered.

Capacity to repay the business loan is the most important of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on other credit relationships, personal and business, is considered an indicator of future payment performance. A business must be able to pay all its debts, not just its loan payments, as they come due. Applicants are generally required to provide a report on when their income will become cash and when their expenses must be paid. This report is usually in the form of a cash flow projection, broken down on a monthly basis, and covering the first annual period after the loan is received.

Before applying for a business loan keep the 5 Cs in mind and be prepared. Taking time to organize, have your plans in writing, and a positive attitude will take you great steps towards receiving the financial backing you are seeking for your business.

Carbon Finance Ltd