In my earlier post, Why Use Hard Money, I define Hard Money Lenders and discuss some of the reasons to use them.
But, are you aware that there are different types of hard money lenders? I recently received a phone call from an upset investor who was in the middle of a rehab and was using hard money to fund it. She had been approved and thought she was borrowing from one source, only to find out they were getting their funds from another source, and that final fund provider was having trouble coming up with the cash when the borrower needed draw reimbursements. As if that wasn’t bad enough, she was having to pay more for the funds than their original agreement.
She asked if I had any idea why this was happening and I absolutely did! This example is, unfortunately, not unusual and most borrowers are not aware how borrowing problems can arise or why they do. Let me explain.
To begin with, the classification “hard money lender” can describe multiple types of lenders and you need to know which you’re working with before you borrow. Exactly where will your money be coming from and what difference can it make?
Types of hard money lenders include:
Direct Lenders – A direct lender draws from large amounts of pooled capital to fund loans. They get their money from wall street, hedge funds, etc. Typically, direct lenders are larger lenders with immediate access to unlimited funds.
Broker – A broker outsources their deals to a direct lender for underwriting and eventual funding. The problem here is that brokers are at the mercy of the direct lender’s timeline and are typically more expensive as they add their fees in addition to what the direct lender charges.
For example, I charge 10% and 3 points. Brokers in my area charge up to 14% and 5 points because they get funding from someone like myself and then add their profit to our fees.
Syndicators – Once presented with a deal, they then raise the capital needed to fund it and often from multiple sources. Syndicators can cause painful delays as they raise needed capital after the deal is already underwritten. And, just as in the above example, their funding source may not come through at the last minute. I know of borrowers being told the day before, or even the day of, closing that their funds will not be available after all.
One reason syndicators run into trouble is that they often borrow from personal friends or family members. At the time of your closing, these friends or family members may have loaned to someone else or simply changed their mind about lending. Don’t go to closing without absolute certainty that your funds are available.
If you’ve heard of someone left hanging by a hard money lender or if you’ve wondered why there is such a large range in cost for hard money, the above definitions should explain.
Your most reliable and source for hard money funds is definitely direct lender. But, if you don’t ask ahead of time, you won’t know where your funding is coming from. Now you know what to ask.