Hard Money Lenders: Pitfalls to Avoid
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For people that have only dealt with traditional lending institutions, dealing with hard money lenders for the first time can be a little intimidating. To alleviate some of that pressure I’ve listed out five pitfalls for borrowers to keep in mind when finding the right deal for them. In addition, I would love to hear some of your suggestions in the comments section under this article.
Top Five Pitfalls:
- Stay away from hard money lenders charging you upfront costs or prepayment fees. This is a common tactic used by scammers against those that are unfamiliar with the rules of private lending.
- Make sure that the contract you are entering into gives you enough time to repay the loan and offers you the flexibility to deal with unforeseen issues. Look at the lender’s experience because a lender who knows enough about the subject matter to help you address unforeseen pitfalls can be imperative to keeping your project on track. For example if you are dealing with fix and flip real estate a lender with a real estate background will be able to work with you more easily and be more understanding to the nature of your business. Lenders get spooked putting money in unfamiliar territories.
- Be mindful that your contractual obligations do not collapse the deal upon signature, whereby the lender equity strips your investment. Furthermore, you want to deal with a lender who wants his money and interest, not your property and a headache.
- Always be looking to receive the money quickly, hence do not leave it in escrow in perpetuity. Keeping your money in escrow will all but assure you never receive all of it.
- Make sure you understand the scope of the work involved in the project and give yourself adequate time to complete it. The lender is dealing with you on the assumption that you have a well thought out plan and exit strategy. A competent lender can generally ascertain if the borrowers has a good plan in mind, however some borrowers may allow a poorly thought out plan to go forward simply to equity strip the property. The only one who can make sure you understand the scope, time, and effort necessary to succeed in the project is you.
Stay safe out there and may your business be prosperous.
Food for thought,
Nathaniel S. Fulford