When it comes to Hard Money Lending, I have 3 important words of advice: Keep It Local. In a perfect world you could make a hard money loan to someone in another state, trust that the appraisal they had provided you with was legitimate and feel secure that in the event of default you would be protected by the equity in the property. But as we all know, this is not a perfect world. If it was, there would be no need for Hard Money Lenders.
Put yourself in a Real Estate Investor’s shoes for a moment. Investing in real estate from long distance is extremely problematic. Finding trustworthy appraisers and contractors isn’t easy when you stay local, let alone from far away. Maintaining control of a deal from long distance is harder still when the investor visits the job site infrequently – if ever. That’s why most successful investors stay local. They know that they can only depend on themselves to look out for their best interests. They learn the property values in their area, the desirable neighborhoods and those to stay away from. They build support teams for their businesses: appraisers, property inspectors, attorneys, title companies, accountants, contractors. There’s wisdom in this approach. It only makes sense that Hard Money Lenders should take the “Stay Local” page from the Real Estate Investor’s Handbook and plagiarize it.
As a Hard Money Lender, you should concentrate your business in a close radius to where you live, no more than an hour’s drive away. Build your own support team of professionals in the trade. When a client brings a potential loan to you, don’t allow him to order the appraisal from “his guy”. You order the appraisal from “your guy”, someone you’ve dealt with before, someone you trust to give you the straight scoop on the property value, not a pie in the sky valuation that will leave you holding a very empty bag in the event of default. The borrower still pays for the appraisal – but you maintain control – just as though the borrower were dealing with a conventional bank. Walk through the property yourself. Bring along your contractor and get a renovation quote to confirm that the borrower’s estimation of repair costs is accurate so that you’ll escrow sufficient funds for renovations. In time you’ll get a feel for various repair costs. But initially you’ll need the help of a professional to make sure sufficient funds are escrowed. If your contractor won’t be competing for the job, let him know that up front and don’t be afraid to pay him for his time for preparing the quote (that’s an “underwriting fee” you could charge your borrower). A contractor who will be realistic with his renovation quote could save you thousands of dollars in the event that a borrower defaults and you have to oversee completion of the renovations yourself. All of this is next to impossible to do from far away.
Always keep in mind that the man who holds the purse strings controls the deal. You’re that man (or woman). You didn’t get in a position of being a Hard Money Lender by being foolish. Making hard money loans on properties that are too far away for you to personally oversee renovating and selling them in the event of default is foolish. It just takes one deal going south to lose you a bundle of money; and it takes a lot of deals going smoothly to make up that loss. Don’t put yourself in a position of having to play catch-up.
Keep it local…