7 Steps To Guaranteed Loan Approval

In todays email:

🤑 7 Steps To Guaranteed Loan Approval

Now that you have been introduced to hard money (see last newsletter), what hard money lenders do, and how they will evaluate you and/or your property, let’s take a look at the 7 KEY steps to guaranteed success in your loan approval process:

STEP 1 - Find the Right Project

When you meet with a hard money lender, you should have your project mapped out in full detail with profit forecasts. Acquiring real estate for profit is a business unto itself and beyond the scope of this report, so we won’t go into detail on this aspect. Hard money lenders want to see that you have a proven, repeatable formula, and that you follow that profitable formula, as that has proven repeatedly to be the key to success in real estate. At Compel Capital (my company that does private lending), we have seen too many investors start buying property in a certain way, then later changing to another way, then another way, etc. This, unfortunately, often leads to failure in real estate investing because the investor never masters one method before moving on to the next. So, make sure you “do what you do best, perfect it, and do it over and over again.”

Successful investors often use a rigid formula of 65% of ARV (after-repair-value) minus construction costs to determine the price to pay for a piece of real estate. This is a good formula to utilize as a first step when considering a purchase. You should also realize what type of projects best fit your skills and knowledge. Is it ground-up construction, single family homes, condos, city, or suburb investing, light rehab, multi-unit? Knowing where to search for your preferred type of project is also essential: MLS real estate, Bank REO’s, short sales, auctions, estate sales, or other avenues should be researched and pursued.

In conclusion, before you start applying for hard money loans, make sure you know your individual success formula. Hard money lenders want to know what that is. And if you don’t have one, it may be a great idea to join an investor group, network and educate yourself, or even get a mentor who can help you develop your own profitable formula. In fact, if you need referrals to these types of organizations, your hard money lender will be happy to refer you to them.

STEP 2 - Executive Summary with Exit Strategy

When you approach a hard money lender with a project, it is crucial that you know your plan and can explain it concisely. A hard money lender will be further impressed by a short write-up, also known as an Executive Summary. An Executive Summary typically includes the amount of your loan request, the reason for your request, a timeline of the property or project including how much cash you’ve invested, the date it was acquired, and the cost. The Executive Summary does not need to be lengthy, but it should be very concise. Your exit strategy is of vital importance because, as previously mentioned, most hard money lenders are not in the business of acquiring property, and they do not want to own your property. They expect performance and repayment according to the loan terms.

Your proposed exit strategy should be “in line” with your credit, financials, etc. Make sure you clearly spell out to the lender whether you will be: 1) buying, rehabbing and reselling; 2) buying, holding and refinancing; 3) buying, holding and paying loan off through other resources (inheritance, other business venture, sale of other property, etc.)

INSIDER TIP - As of 2009, the easiest and most successful exit strategy, and the one most successful investors are using, is the quick rehab and re-sale to a homeowner. Getting a refinance on an investor property is very difficult in today’s banking environment, so if your exit strategy is to buy, hold and refinance, it will be viewed with great skepticism by the lender unless you have strong credit and financials.

STEP 3 - Full Loan Application

It is often assumed that hard money lenders look only at the property’s value without assessing the borrower’s personal financial situation. This may still be true with some hard money lenders, but most private lenders in today’s environment, including Compel Capital, will review your financials. This is done to ensure that you have the capacity to repay the loan if you end up holding the property longer than expected and to help ensure the hard money lender does not end up owning your property. Your financial portfolio should include any real estate owned, whether a primary residence, a rental property, commercial property, or undeveloped land. If you are experiencing a cash flow problem, you can offer another property as collateral (often termed “cross-collateral”). Providing a detailed and accurate summary of your financial status will improve your chances of successfully securing a hard money loan. If you require a loan application, you can utilize ours located at the bottom of the page on this link…https://compelcapital.com

STEP 4 - Comparable Sales and Pictures of Property

At Compel Capital, we believe there can never be enough pictures. Chances are you already have this information if you are analyzing numbers and considering purchasing a property, so why not send it to the lender? Some lenders have MLS access and can acquire comparables in minutes. If your proposed ARV (after-repair-value) matches up with the lenders, that makes a good impression. If the lender does not have MLS access and relies upon appraisals, pictures, and comparable sales data, sending this info over will make the lender’s life that much easier. Today’s digital technology makes sending a picture of the property an easy task and can greatly expedite the loan approval process. Pictures provide a clear insight of the property, what work is required. And don’t forget to take pictures of the surrounding homes and neighborhood, as that will be very valuable to the lender in determining whether your property is in a nice area with strong resale potential.

STEP 5 - Contractor Estimate and Scope of Work

Unless it’s a paint and carpet type of rehab project, have your contractor look over the property and provide a detailed cost breakdown for rehab and repairs. Quite often these figures will differ substantially from your original estimate. It is to your advantage to have a firm estimate in hand before ratifying a contract with the seller. Provide the hard money lender with a draw schedule of projected work, as well as the cost and timeframe. And make sure that any estimates from a contractor are in writing. Also, make sure you are using licensed contractors and sub-contractors. If you don’t, this could cause many different problems, and hard money lenders don’t like problems.

You will also need to closely evaluate all the neighborhood properties to make sure that once the work is completed, your property will sell at or near the same price as you originally projected.

INSIDER TIP - Make certain all your projected improvements to the property are “on par” with the surrounding neighborhood. If your rehab is below par for the neighborhood, you may not be able to sell the property at the price you desire. If you over rehab, you will have wasted money on unnecessary and expensive materials.

 STEP 6 - Bring Something of Value to the Table

You will not need all of these elements to get your loan approved, but you will most likely need one:

· Cash

· Cross Collateral

· Credit

· Experience (or Experienced Partner)

Cash - the adage “money talks” applies here. If you own several liquid assets you are viewed as a low-risk borrower. Quite simply, it demonstrates to the hard money lender that you are a good saver, know how to manage money, and can afford the loan payments. It also demonstrates to the hard money lender that in the event something goes wrong (i.e., longer holding time on property, higher than expected construction costs, etc.) you will be able to handle those problems and won’t end up in default. Make certain to include all your cash accounts on your loan application.

Cross-Collateral - as referenced previously, cross-collateral (meaning other real estate or collateral that has substantial equity), can sometimes take the place of your cash contribution. With sufficient cross-collateral, you may be able to leverage, or “buy into”, projects with no out-of-pocket cash. Remember to include any other real estate that you own on your loan application. Or if you have substantial equity in other assets (boats, planes, government bonds, etc.), you may be able to use those to replace cash.

Credit – most hard money lenders understand that credit is not the sum total of who you are, and don’t use this as a primary factor in deciding on loan approval, but it provides a moral compass for the lender. If you have an outstanding credit history, have always paid on time, and have always repaid your loans, this assures the lender that you are likely to honor any outstanding contracts with them as well. This is a crucial point for a lender who wants high performing loans, and it can override other weaknesses.

Experience (or Experienced Partner) - If you do not possess any of the elements above, then your strongest asset will be an experienced business partner who does. If you excel at finding profitable projects, you will find a good number of people who are willing to work with you. Ideally, if you excel at finding profitable projects and also possess the ability to oversee and complete the project, you will find it easy to secure a sound business partner. And that looks good to a hard money lenders.

STEP 7 - Perform, Perform, Perform!

Performance reveals to the hard money lender how reliable you are. It is crucial that you are accessible and responsible. And performance does not just mean making payments once the loan is in place. Performance starts the minute you contact the lender and make application. The lender will make very fast judgments about your ability to repay the loan based upon simple things you do such as:

· Returning phone calls and emails promptly.

· Answering any and all questions of the hard money lender truthfully.

· Staying organized and providing all requested documentation and information to the lender quickly and in a very organized fashion.

Think about it this way: Hard money underwriters are people too. Who are they going to be more likely to deal with: people who don’t answer their phones or people who do? If you are honest and open with your lender, help the underwriter get through the application process quickly and in an organized fashion, and communicate effectively, your chances of success increase dramatically.

Once you have an active loan, it is absolutely critical that you finish your construction on time, make your monthly payments, and stay in close contact with your lender if you wish to have any other loans approved.

INSIDER TIP - Your relationships are everything! Whether it be with other investors, contractors or lenders, the key to success in real estate is to acquire and maintain long-term relationships with other people in the industry doing business. If you are known as a person of integrity and have a strong network of successful people on your team, your hard money lender will be asking to do business with you, not the other way around!

Apply for your loan today.

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