“I need your help!!! What can you do?” A desperate female voice was on the other end of the line. I could tell that her heart was beating, and she was out of breath when she called our office around 4pm last Friday. If I don’t close on this house on Tuesday, I will lose my $5,000 earnest money and way more than that in profits.
Once she calmed down, we were able to get more information. It was a solid deal we had looked at a few weeks earlier. She was a new client that we have not yet had the pleasure to work with. She was willing to put 10% down, so she was a candidate for our 90% Acquisition Loan. Thankfully, because we can close that loan really fast!
“Price fixes everything” A favorite phrase of mine when talking about real estate. The phrase holds true when you are selling a house but cannot be further from the truth when borrowing money. Our new client almost learned this the hard way. Thankfully we were able to get her closed, but had she called any later, I am not sure we could have done it.
What happened was she called several weeks before shopping for the loan. We spent some time with her and walked her through the numbers on the deal. We quoted her the standard pricing of 2 points in a fee and the interest rate. We would loan 90% of her purchase without an appraisal. She continued to shop and found another, much smaller hard money lender, that quoted her 1.75% in fees and the same interest rate. Looking at pricing alone, it was a better deal, so she went for it.
The problem was this other lender could not deliver. They did not have the funds available, but luckily, they let her know before the day of closing, which I have seen happen multiple times. When she called us back, she apologized for not working with us after we spent so much time with her and begged us to help. She almost lost her $5,000 and what looks to be about a $35,000 profit. All because she wanted to save.25%. For her loan, that equated to a savings of only $460. Hoping for a $460 savings, she almost lost it all.
Many lenders use smoke and mirror strategies to get new investors in the door. They are focused on making loans, not helping investors succeed. It is a turn and burn model and relies on constantly bringing in new clients. The way you win at that game is to have a better price. New investors focus on price instead of what really matters like relationships, reliability and support.
In the last five weeks we have closed two loans where we refinanced other hard money lenders. In both cases, the borrower had more time on the loan but in each case, they were no longer comfortable with their lender and wanted out. We are happy to jump in and support our clients, but it is important to understand that chasing prices in both cases ended up costing them big. They had to pay a new set of fees and closing costs just to get out of the other loans. In both cases, the other hard money lender ran out of construction funds, even though they committed to funding the repairs. And it was two separate hard money lenders!
When shopping for a loan, pricing is an important piece, heck, the price you pay directly impacts your profit. But it is not the only variable to consider. Be sure you are working with reputable hard money lenders and make sure you are comparing apples to apples. Here are some questions to consider:
- What do you get with the higher priced lender that you don’t get with the less expensive option?
- What is the term of the loan and what happens if you need to extend?
- What is the draw process for repair funds and how long does that take?
- Are repair funds put into a separate trust account (like the ones used by title companies and attorneys) so it is available for you when you need it?
- Does the lender have a good reputation for closing when they say they will close?
- What is the down payment requirement?
- What about prepayment penalties, payoff fees, minimum interest, or other hidden fees?
- Are they sufficiently staffed and able to help when you need payoff statements or lien releases?
When you see hard money lenders advertise rates under 10%, it normally means they are extremely conservative loans. From what I have seen, it is just as easy to work with a bank than the lenders in this price point, and banks will be in the 5% to 6% range. It is rare to use a hard money lender when you have the same requirements you would with a bank.
We would love to be a resource for you, but we do understand that we cannot win all the business. Sometimes it makes since to go with another lender. With that said, we are happy to spend some time with you and discuss your needs to help direct you to your best option. Give us a call and let us help!