Why You Need a Local Hard Money Lender

We’ve recently been getting many phone calls from rehabbers looking for an alternative to their private lender. Curiously, the reason for wanting to switch is almost always the same. These borrowers are tired of dealing with an out-of-state lender and want to work with lenders who are local to their area.

This is not surprising. Forming a local partnership offers distinct advantages to both real estate investors and hard money lenders. This is precisely why our company, New Funding Resources, chooses to operate only in Maryland, Virginia, and Washington, DC. It’s simple – we know this area inside out. We know what works and what doesn’t – not because our out-of-state headquarters sent us the underwriting matrix we have to follow, but because we’ve seen for ourselves which type of transactions are good risk and which are more trouble than they are worth.

So, let’s enumerate all the reasons why a real estate investor like you would be better served by working with a local hard money lender.

Working with Local Hard Money Lenders Helps You Manage Risk Better

For the uninitiated, shopping for a hard money loan might appear the same as shopping for a loan to purchase a primary residence. After all, you inquire about the terms of the loan, the fees, and the rapport you built with the person on the other end of the phone line. You put considerable trust in this person’s word and hope that the terms they’ve promised remain the same at the time of closing.

However, the differences between conventional lenders’ underwriting and hard money lender’s underwriting cannot be more pronounced. First of all, conventional lenders underwrite to ensure that the loans are sustainable in the long term. This is why they verify that you make enough money to make your monthly mortgage payments (thus borrower need to meet the debt-to-income ratio), history of steady employment (to mimize the risk of losing your income), a track record of paying other debt on time, and some savings to ensure a degree of financial discipline that is expected from a homeowner. That’s a lot of verifications, but once an underwriter is properly trained, they can start underwriting loans all over the country. The same criteria will apply to a homeowner in Iowa, Florida, or Nebraska.

Hard money lenders are laser-focused on collateral. This is why they are often referred to as asset-based lenders. For example, at New Funding Resources we don’t verify your income, are not concerned with the sources of your funds or their seasoning, and are not credit score driven. The main thing that we want to know is that the distressed property they are about to buy lends itself to a profitable fix-and-flip. And THAT decision, my friends, is about being a local hard money lender and knowing the area you operate inside out.

Local Hard Money Lenders Can Help You Make the Right Decision

Local hard money lenders specialize in evaluating whether your investment is likely to generate a sufficient profit to make it worth your while. Your intersts are aligned with theirs. If your risk is high, so is theirs. If you find a deal of a lifetime, the chances that you lose your money on the transaction are low. So is the chance that the lender will lose THEIR money. No one can evalute that risk better than a local hard money lender. It’s like having an experienced partner or a free consultant who is financially vested in the success of your venture.

On the other hand, it’s impossible to have an intricate understanding of real estate markets nationally. I feel I can share a lot of wisdom about the DC market, the Baltimore market, and the Eastern Shore market. Investing in Fredericksburg is very different from investing in Frederick, and we might underwrite differently in those areas. That said, I will never presume to advise you on what type of properties are the best to invest in Florida or Arizona or what areas to avoid.

Local Hard Money Lenders Can Help You Better Manage Your Rehab Project

The differences between residential and hard money lenders don’t stop at the closing table. Unless you are refinancing your conventional loan, you are unlikely to speak to that residential lender again. It will probably take them a couple of months after the closing of your loan to sell it to a servicer. After that, you won’t even be sending them your monthly payment. In contrast, one of the most important parts of working with a hard money lender begins at the closing table. I am talking about managing renovation draws.

Private lenders base their loans on the property’s after-repair value, not on its value at the time of purchase. For them, it’s essential that the borrower finishes the agreed-upon renovations. To ensure that the funds allocated for the renovation will not be used for other purposes, all or a part of the borrower’s rehab costs are typically set aside in a separate construction escrow account. The funds are dispersed only when the borrower completes specific renovation stages.

For the partnership between a hard money lender and a borrower to be successful, both parties must live up to their ends of the bargain. The borrower must ensure that the rehab progresses as agreed. In its turn, a hard money lender must disperse the funds promptly. Local hard money lenders are in an excellent position to do so fast. For instance, we typically schedule a draw inspection at our borrowers’ earliest convenience. We also send the funds electronically right to the borrower’s account. The proximity to the property and the size of our company ensures smooth communication between departments. It’s frequently not the case with larger out-of-state lenders saddled with levels of bureaucracy.

Local Hard Money Lenders Are Faster and More Responsive

So, let’s talk more about bureaucracy. Truth be told, local lenders tend to be on a smaller size. It means that they move faster, are more nimble, and often provide unparalleled access to a decision-maker. Each day you are waiting for a draw or a returned phone call or have a dispute with your lender about the quality of your rehab can potentially cost you thousands of dollars. It’s literally eating into your profits. Time is money, especially in the rehab business. You need to work with local hard money lenders who communicate effectively and minimize delays.

Local Hard Money Lenders Are … Well… Local

Let me ask you one final question. Would you work with an out-of-state real estate agent? Why not? Even if they have access to the same listing database as your local real estate guy? I assume the answer is still “no.” Is it perhaps you would expect a local real estate agent to be able to impart more “local” wisdom and give you better advice? Flipping homes is also a process, not a one-off transaction. A process requires a certain degree of partnership. Such a partnership is more easily achieved with someone who is local – even you don’t meet them for a while.

Think about your hard money lender in the same way. Yes, they have to offer a fair deal, but they also need to be able to help you increase your profits in more ways than one. They need to help you manage your risk and to identify and address any red flags that might cause you issues. Their staff needs to be accessible, knowledgeable about the local real estate markets, and empowered to make decisions. A local hard money lender is uniquely positioned to meet these criteria and help your real estate business thrive.