Just because it is easier to secure funding for hard money loans because you are dealing with private investors, doesn’t mean the money is available without any strings. In order to secure the short-term funding, these investors are going to be looking for some information to convince them they should invest in your endeavor. Once your ducks are in a row, the entire loan process can take weeks compared to the several months you would have been waiting at the local financial institution.
Here is some information concerning the due diligence information the hard money lenders may require;
The Reason for the Hard Money Loan
When you apply for a traditional loan at the local back, the reason you are borrowing the money is only one of many questions the risk department will be concerned with. With hard money loans, these private investors have one real concern, the reason you need their money. Perhaps you are a house flipper and you already have a buyer lined up but you need to spend a considerable amount of money in order to bring the house to compliance. Whether you are flipping or a real estate developer who has a short deadline approaching, it is important to be open with these investors at the start concerning your intent for their money.
Preparing documentation that shows you already have buyers lined up for the property and the wheels are already in motion can go a long way in allowing the investors the piece of mind they need in order to put out the cash.
The Value of the Property in Question
It really doesn’t matter if you are renovating a single family home or you have a small strip mall under development, the hard money investors are simply concerned with the value of the property. If you are looking to a secure a $500,000 loan on property worth $400,000, it will be a tough go convincing anyone to take that risk. If you need $900,000 and already have a buyer lined up to sell the property for $2,000,000 after renovation, these investors want to see proof.
Take the time and provide the investor this due diligence information so that they can have peace of mind and be more inclined to cut the check. The more details and solid your information about the ARV, after repair value, the easier it will be to secure the hard money loan.
Documentation on Completion of Restoration
When it comes to providing the hard money investors information, nothing will be more important that the ARV, after repair value. If the property is worth $300,000 today, but will be worth $900,000 after the funding, then these investors can determine if it is worth the risk. Loaning a quarter million on a property that will be worth more than triple than that after repairs is a sound investment, but more than your word will be required. Take the time before applying for the hard money loan to gather documents that show the value of the property as is today, what the costs will be to the penny to make the repairs, and the appraisal of the said property when work is completed.
When these documents are in order and presented to the investor, it will be more likely they will release the funding quickly to help you to close the deal.
Ability to Provide Additional Collateral
Even after providing the investors with the ARV, they may still be a little apprehensive to float the hard money loan. After doing their due diligence, perhaps they are close to making the deal but need more collateral. Perhaps after reviewing the numbers, they feel the value of the property might be a little too high, but to compensate for the overage, they will consider modifying the terms of the agreement. In order to secure the loan, included with the value of the property may also be your residence or your retirement account as further collateral.
When you are confident that the monies for the repaired property will more than cover the hard loan, then giving the investors piece of mind by upping that collateral might be a small price to pay to get funding quickly. If you are willing to include other collateral, these investors will usually go ahead with the hard money loan.
Hard Money Lending Conclusion
Although the benefits to securing hard money loans are numerous, there is some due diligence necessary to put the mind of the investors at ease. These investors are not frugal with their capital, they have specific needs in order to provide the bridge loans borrowers need.
Take the time to secure all the necessary documentation and the investors should be in the best position to providing the funding in short order.
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