What do private-money lenders like to see from investors who are seeking financing?
We look for investors who have a well-thought-out plan that they can execute. That includes having comps that make sense, a good idea of a property’s repair costs and a team of contractors ready to go to work. You also should understand the market you are investing in. For newer investors, I highly advise them to operate in the market they are comfortable with, or even live in. By targeting a neighborhood within a 20-minute drive of your house, you will be more likely to know its strengths and weaknesses, its potential problems and opportunities.
What kind of advice would you give someone who’s seeking a private-money loan for the first time?
The first question they should answer is, are we a good fit for them right now? That is, are they ready to work on multiple projects at the same time, and do they need the leverage that our loans can offer? Some investors like to pay only cash for any properties they acquire. But that ties up their resources and can limit them to one deal a year. By seeking financing, they can do more and grow their portfolio of properties faster. We like new investors because we can build loyalty and new investors eventually become experienced investors.
What do the investors who consistently get approved for financing do differently?
Once someone’s done one transaction with us, they are much more apt to be approved again. We love repeat borrowers. But generally, someone who has done 10 or more transactions has seen the good, the bad and the ugly of real estate. They have learned from their mistakes, so they are nimbler and can react quickly when problems arise. For example, they probably will not overestimate the after repair value (ARV) of a property. They also know to include a buffer in their repair budget in case there are any cost overruns. A cushion of 10 percent is a good idea.
What are the most common mistakes that borrowers – especially new ones – make?
The No. 1 thing we see is not knowing where to invest. Some applicants might have taken a course and are now very excited about getting into investing. But before they try to line up financing, they should know what areas they are targeting. That is because finding a good property, finding the right deals, is HARD. They should also be careful not to rely on Realtors and other third parties to tell them if a deal is good. They are trying to sell you something, after all. If you do not know the market, the deal might not materialize like you expect.
Why is it important for investors to build a long-term relationship with a lender?
It is the time component. You want someone who can close on time and reliably. You want a sense of certainty that, once you have made an offer on a property and put up your earnest money, that your lender will deliver that check for you. Plus, there’s the convenience. If I had to find a new accountant or lawyer every year, I would not be very happy.