Save money and time, and avoid scams and last-minute term changes using a direct local hard money lender
What is hard money and what is a local direct hard money lender.
Hard money loans are underwritten primarily based on real estate (i.e., the hard asset) value. In contrast, banks often focus on additional factors such as borrowers’ income and credit. Therefore, the hard money loan process is often much easier and faster than navigating a bank’s loan process. Days or weeks instead of months. This is because hard money lenders are typically not concerned with factors like income and all the related documentation and verification. People use hard money loans when: (1) a bank is too slow for the quick funding required by the deal or situation or (2) a bank will not loan funds because of an income or credit issue.
A hard money lender provides hard money loans.
A local direct hard money lender means that:
- the money is coming directly from a single source controlled by the individual(s) underwriting the loan, not from a fund, multiple people, set limited partners, a publicly owned company, other situations where more than one person is providing the money, and not a loan arranged through a mortgage broker; and
- the hard money loan is underwritten by an individual residing relatively close to the collateral property.
There are hard money funds that are local, but their obligations, and motivations are often different. A local direct hard money lender can be flexible and practical. For example, funds may have contractual obligations to obtain an appraisal for every property. A direct hard money lender may not require appraisals.
There are brokers who work with multiple hard money lenders (including direct lenders and fund lenders with multiple investors). Such brokers might choose the lenders who pay them the most rather than the borrower the best terms. Also, brokers may not have local knowledge and could have much less incentive to ensure the borrowers or lenders don’t lose money in the end.
Skip the appraisal – Local direct hard money lenders often loan without appraisals. Many local hard money lenders do not require appraisals for one-to-four-unit residential properties. This can save you money and time. In contrast, hard money funds cannot skip the appraisal; they are contractually obligated to obtain one. That can delay closings and cost the borrowers hundreds of dollars.
Avoid upfront fees – Many local hard money lenders do not charge upfront fees (i.e., fees paid to the lender/broker before the loan origination). Often, these upfront fees are non-refundable. Some lenders will charge small application fees (less than $100) that cover costs like credit and background checks.
Avoiding losses on the back end – A mortgage broker or fund manager, will often make money just by getting the loan originated. That person may not take on any risk if the property is worth less than expected. That risk may fall solely on the borrowers, the fund investors, or the party providing the loan funds. A person may be much more concerned with risk of losses for the borrowers and lender, if that person is directly providing the money. Sometimes, the local knowledge can help you better estimate the current and future value of the property. Appraisers will sometimes not base their figures on comparable properties (which can occur for legitimate reasons, like no recent nearby sales being available). Local knowledge can involve knowing that a location is downwind of a brewery or factory, differences in schools, local government policy changes, or other local dynamics that can impact value. There is no guarantee that a local hard money lender will have important local knowledge, but there’s a better chance they will.
Advanced Fee Scams – Beware of lenders requiring large upfront fees before the loan origination. Also beware of “release fees” or any charges to have the loan funds released. These types of schemes are commonly known as advanced fee scams. Borrowers should not need to pay advanced fees to a “lender.” Fees paid to third parties (e.g., inspectors, surveyors, structural engineers, etc.) may be legitimate; however, it’s important to first verify that those vendors are legitimate businesses. You can avoid some fake lender scams by verifying and directly paying vendors prior to the loan origination.
Other scams – Avoid additional scams by: (1) meeting with a loan decision-maker in person; (2) verifying that the person and company are real; and (3) verifying that your contact is the actual person they claim to be. Because scammers are often remote and don’t want to be identified they may be unwilling to meet in person. Verify the company by checking the company’s state registration. The Secretary of State usually maintains a database of company registrations, including addresses. Verify in multiple ways that the person you are taking to with is who you think they are: (1) call the phone number on the company website to reach that person; (2) the website might be a front, so verify by going to the Better Business Bureau (BBB.org) and checking for the rating and history for the metro area the property is in, as well as calling the phone number listed with the BBB to reach your contact; and (3) check public records for mortgages/deeds of trust and verify details such as the company’s address.
You can learn more about related scams here.
Avoid surprise fees and last-minute term changes…
Sometimes, a hard money lender is really just a broker who arranges loans from others. Such a broker can promise low rates and fees to get borrowers. However terms may change shortly before closing (when the borrower has little choice). The broker might claim their original fund source backed out or that some other unexpected situation arose. Local direct hard money lenders are less likely to use deceptive practices like this. Typically, local direct hard money lenders are concerned about their reputation in the community and highly value repeat business. Whether lenders are local or not local, look for honest and ethical people. Generally, involving yourself with people who highly value ethical behavior and care about others is a good practice. If the rates and fees are not clear on the website, ask for a written term sheet. The term sheet should include rates, fees, and conditions to close among other details.
Note: If an application provides materially incorrect information , it is likely and reasonable the terms will change. Example where terms might change or loan offer cancelled: The borrower states the property is in good shape with no issues, there are roof leaks, structural issues, or other issues that could affect the current or future value the property.