How To Make Your Deals Appealing To Lenders

In todays email:

🫣 Sneak peek into how to make your deals appealing to lenders

🤑 Basic lending guidelines - the 4 C’s of lending

🥶 4 cool tips to help you through the loan process

How To Make Your Deal Appealing To Lenders

I will explain how to structure your deal and make your deal appealing to the hard money lender, but first let’s look at some basic lending guidelines for private/hard money loans. (Note: The term hard money and private money will be interchanged throughout this newsletter). Although there are many different types of hard money lending programs, the following can be used as a general guideline for determining whether your situation would be appropriate for a hard honey loan. Remember - because hard money lenders are very flexible, these are not hard and fast rules, just guidelines, so even if your situation does not adhere exactly to these guidelines, you may still feel as though you have a good project. If you have some compensating factors in your deal that overcome weaknesses, the hard money lender will be able to help you assess your deal and determine if it is one that fits the criteria for a hard money loan.

TIP:  Never be afraid to ask your lender, “What about this deal don’t you like?”Or “What can I do to make this deal more attractive to you?” Hard money lenders want to lend. Maybe there is only one or two things you need to do to make your deal a homerun, but you’ll never know unless you ask!

Unlike conventional lenders that use complex credit score and income formulas, along with volumes of strict underwriting guidelines, hard money lenders utilize basic, flexible, common-sense underwriting to analyze each deal. Every application is viewed from many creative angles to determine whether the property and the borrower are properly suited for a hard money loan. Different hard money lenders look at things very differently, and like different types of deals. Make sure to understand what types of deals your lender is looking for.

TIP:  Ask your hard money lender what their “sweet spot” is. Every lender has a different niche, and you don’t want to waste your time applying to a lender that doesn’t like your type of deal. In what geography do they lend? The city or the burbs? Do they like land or just structures? Residential or commercial? A good lender will have no problem telling you exactly what types of loans they are looking for.

So, what is “common-sense” underwriting? At Compel Capital, we follow the time-tested evaluation of the “4 C’s” – that being 1) Collateral, 2) Character, 3) Capacity/exit strategy, and 4) Credit. Let’s take a look at each of these from the eyes of a hard money lender to allow you to better understand how to increase your loan worthiness. Always remember that these factors are evaluated to make sure the deal is profitable and secure to both the lender and the borrower, so if the loan is denied, it is a good idea to understand in which category your deal fails so you will know how to better improve your chances of success in the future.

1. COLLATERAL - What is the value of a property from a sale and/or income approach? Typically, valuations are done through sold comparables, appraisals, and BPOs (Broker Price Opinions by real estate agents). Hard money lenders will also perform physical site inspections. Hard money lenders don’t use traditional “appraisal” evaluations based upon a 180-day marketability study. That’s what banks use. Rather, your hard money lender will want to know how much your property would fetch in 30 or 60 days in the current marketplace. If there is a default and a foreclosure, the lender wants to resell the property fast, get the private investor’s money back, and put that money back out into other loans. They cannot afford to lose money in any deal, so they are very conservative in the evaluation of property.

   TIP:  Never, never try to misrepresent the value of your property. Hard money lenders are conservative. They lend on property based upon conservative values to ensure their money is safe. Hard money lenders will ALWAYS do their homework and determine the “true” value of your property. Thus, it doesn’t do any good to try to hide or overstate it – the lender will figure it out.

2. CHARACTER – Banks can’t look you in the eye and determine your character like in the old days of banking. That’s why they had to develop complex credit and income formulas to determine your creditworthiness for a mortgage. Fortunately for hard money lenders, they can look you in the eye, talk to you on the phone, and get a good feel for whether you are a worthy borrower. So, for hard money lenders, this is a big factor. Here are some questions the lender will ask about you:

    

   · Do you have experience investing in real estate or managing rental properties? Lenders are very cautious about high-risk borrowers, such as a real estate investor seeking financing for their first rehab project.

   · Do you possess excellent communication skills? Lenders prefer to work with a borrower who is readily available and accessible. A lack of communication in initial loan negotiations represents a caution flag to lenders; if a borrower is not accessible initially, lenders see that as a potential for problems should the loan default.

   · Are you conscientious, reliable, and honorable?

    

   The hard money lender will scrutinize each borrower, property, and loan documentation thoroughly in an effort to ascertain that all information disclosed during the application process is legitimate. Therefore, be certain any documentation you provide the lender is accurate, professional, and presented to the lender in a timely, organized manner.

3. CAPACITY/EXIT STRATEGY – Your hard money lender will analyze your financial abilities to both make any anticipated loan payments and get yourself out of the deal. For instance, if you have a poor credit score and limited income, yet you seek a loan you claim that you are going to “refinance” in 6 months, both your capacity and your exit strategy will be questioned. Some of the questions you may be asked are:

    

   · What is your exit strategy?

   · Will you sell or refinance?

   · What is the timeline for your project?

   · Is this project realistic and doable?

   · What Is your repayment plan for the loan?

   · Can you verify income, available cash, and assets?

    

   The goal of the hard money/private lender in asking these questions boils down to the following: The lender will want to know that you can exit the loan prior to approving the loan. This is critical to ensuring the loan is repaid on-time.

4. TIP:  Credit isn’t everything, but it tells a story. At Compel Capital, we realize that one reason you may need a hard money loan is because of credit issues. That is why it is not the most important underwriting criteria. But recognize that will be used in understanding your character. For example, did you lose a job? Get a divorce? There’s always a story behind a credit report and we want to hear it.

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