Working With A Private Money Lender: What NOT To Do

Many of our previous blogs focused on things you should be doing to succeed as a real estate investor. For example, we shared our perspective on how to get real estate deals and how to build a real estate investing team that will propel you forward. We talked about what it takes to be a rehabber and what you need to do to minimize your risk. However, what’s equally important is knowing what NOT to do to succeed.

There is a quote, most often attributed to Woody Allen, that “50% of life is just showing up.” In real estate investing, 50% of it (or more!) is avoiding mistakes. Some mistakes can be small. You might not be aware you are making them, but they can slowly chip away at your profits. Other mistakes can be catastrophic and wipe out years of savings and hard work.

The truth is that you can make costly mistakes throughout the life cycle of your project or even before you identify the property. So, let’s kick off our “What Not To Do” series with something that is near and dear to me personally as a private money lender – what you SHOULD NOT be doing when shopping for a renovation loan.

Things You Absolutely Should Not Do When Working with A Private Money Lender:

You Should Not Believe The Hype.

Everyone wants to get a good deal. We understand and do our best to keep your borrowing costs as low as possible. But let’s face it – some rates advertised out there are gimmicks designed to rope in unsuspecting borrowers. How do we know it? Because we checked and, truth be told, our borrowers checked, too. Most importantly, because if those rates were true, they would wipe off the competition. The promised extra low rates tend to evaporate fast when put to the test. One client of ours was promised a super duper low rate only to have it increased right before the closing. The reason for the increase? A medical collection for $25 on an otherwise stellar credit history. No private money lender cares about a small medical collection – unless of course, it’s a reason to bait and switch. As we like to say, free cheese is only offered in mousetraps.

You Should Not Think Your Relationship With A Private Lender Stops At Closing.

A private money lender like us works differently than traditional lenders who hold mortgages on primary residences. When you buy or refinance a primary residence, your main interaction with your mortgage company is during the underwriting process. You want to have a low rate and a timely closing, but after the closing, you’ll rarely speak to your lender.

The opposite is true when working with a private hard money lender. You’ll remain in close contact with your lender throughout the duration of your loan and your renovation process. In most cases, your private lender will manage your construction escrow. That means you will depend on your lender to disperse the construction draws fairly and efficiently. To do so, your lender must be accessible, responsive, and competent throughout the term of your loan, which can last nine to twelve months. You are entering a quasi-partnership where both parties depend on each other to manage risk and financial success.

You Should Not Sound Incompetent.

It sounds obvious, but you would be amazed how many people don’t know the basics of real estate investing or even the most commonly used real estate term. We work with all types of investors, including novices. We openly share our knowledge and do not mind occasional “hand-holding.” There is no shame in being nervous about submitting an offer on your first real estate investing transaction. However, a lack of experience should not mean a lack of preparation.

For example, it spooks our underwriters out when we need to explain what a ratified contract is. Really? A ratified contract? Even if such a borrower has plenty of money in the bank, we will think long and hard before lending to them.

First impressions are important. For more information on how to make a great first impression you can read our article on how not to start a conversation with a hard money lender.

You Should Not Be Slow to Respond.

Some real estate opportunities are more complex than others. They might be profitable and even be a home run, but they are often riskier. Therefore, they require more analysis and work from the borrower and the lender. If we ask you for additional information, make sure you get this information to us in a reasonable time. If life interferes and you are delayed, let us know. Demonstrate that you are responsible and driven to overcome hurdles and challenges. Trust me, our underwriting requirements are straightforward. If you are struggling to comply with them, you might discover that you’ve bitten off more than you can chew during the renovation process.

New Funding Resources is a private money lender in Maryland, DC, and Virginia. We provide quick and flexible financing for rehabbers and real estate investors to purchase and renovate real estate in the Greater Washington DC area.