How to Play Hardball with Hard Money Lenders

Hand squeezing a stress ball

By Greg Herlean

A lot of first-time and novice real estate investors go with hard money loans on their house flips because they present a pretty easy way to get funding. If you don’t have a lot of connections in the investing world yet, getting a private lender or an investing partner to sign on with you can be pretty difficult, and while hard money loans have high interest rates and fees associated with them, if you fix and flip fast, you won’t have to worry about the interest. Of course, you’re taking a risk by banking on making your rehab and sale deadline, but every investment comes with some risks.

Even if you’re brand new to the flipping business and you’ve never gotten a hard money loan before, though, you shouldn’t have to take the first loan that you’re approved for. You also shouldn’t agree to a higher interest rate than you’re comfortable with, and you should be able to negotiate how many “points” (additional fees) you have to pay on the loan, as well. To do this, you’re going to need to know a few things about hard money loans and about your lender in particular.

Your Credit Doesn’t Matter

First, your credit doesn’t matter in a hard money loan. What matters is the value of the property you’re going to buy with the loan. Because this kind of loan is specifically given to pay for houses in cash, you’re generally going to be approved for a loan valued at 50-70% of the house’s market value after repairs.

As a flipper, that’s fine for you, but if you don’t have any other funding set up, you’ll have to watch your rehab budget like a hawk. You may be able to negotiate for a higher loan amount if you bring in research on comps in the area and market trends. If you can prove that you can sell the house for more than your lender initially thought, you can probably get more cash for your project.

Bringing in an estimate from your contractor can help you get more cash, too, especially if you can prove that the rehab projects you’ll be doing will significantly increase the value of the house and help it sell faster.

Know Your Lender

Next, don’t ever go into a deal like this blind. You want to know as much as you can about your lender before you meet with them and before you sign any documents. Are they known for charging more points than other lenders? How are their interest rates? How long is the duration of a typical loan from them?

Bring Your Real Estate Attorney

Finally, don’t sign anything until your attorney has taken a close look at your loan contract. Make sure that all of the terms are to your liking and that you can work with both the interest rate and any additional points. Then, once you’re satisfied with the contract, you can sign it, get your cash, and fund your flip.

On that note, though, I should point out how important a good exit strategy is whenever you’re borrowing capital. Whether you’re funding your house flips through a hard money lender or private lender, you should have a solid plan for paying them back, even if your fix and flip doesn’t go as well as you originally planned. You’re going to have hiccups and challenges along the road in this business, but if you can learn to play hardball and negotiate a great deal with hard money lenders, you’ll be on your way to running a successful flipping business.


About the author

Greg has spent the last 10 years focused on the growth opportunities and wealth accumulation through Real Estate vehicles. He has provided management direction, capital restructuring, investment research analysis, business projection analysis, and capital acquisition services which governed and impacted over $700 million in Real Estate transactions. Greg is also a much sought-after platform speaker on the topics of capital development, investment growth through use of self-directed IRA vehicles, and estate planning.

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