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Hard money lending provides real estate investors access to funding when traditional sources aren’t available. However, due to the higher risks lenders face, interest rates tend to be higher with stricter terms. While the flexibility of hard money can enable deals traditional lenders won’t touch, it also comes with dangers for the unwary. This extensive guide shares 7 essential tips for avoiding costly mistakes when using hard money loans. With diligent planning and risk mitigation, hard money can boost returns – but negligence can ruin budding careers before they take off.
1. Vet All Hard Money Lenders Thoroughly
While speed and flexibility entice, unscrupulous lenders may take advantage. Research credentials like licensing, experience, consumer reviews and better business bureau ratings before signing anything. Check state regulatory bodies for complaints too. Reputable hard money sources uphold quality standards protecting borrowers.
2. Get Loan Terms In Writing
Once a lender is selected, ensure all terms and conditions are put into a formal written agreement before funding occurs. This protects the borrower from any discrepancies or changes during the loan term. Verbal promises mean little if they are not part of the signed contract. Getting loan stipulations in ink prevents ” handshake deals” from blowing up into disputes later on. Have a lawyer review the written agreement to check for any concerning legalities before signing on the dotted line.
3. Use Funds Only For Intended Purpose
Hard money loans are typically provided to finance short-term real estate projects, so the funds should only be applied to the specified property or business venture. Nashville hard money loans are not intended as personal lines of credit to spend frivolously. The lender will have stipulations in the agreement regarding acceptable uses of the capital. Going rogue and diverting the cash could constitute loan default if discovered. Stick diligently to utilizing the money for the pre-approved purpose to stay on good terms with the lender.
4. Closely Monitor Timelines
Since hard money loans usually come with balloon payments due within months, keeping tight timelines is crucial. Borrowers should have stringent project schedules in place with built-in contingencies. Unforeseen delays are common on rehab jobs but ballooning timetables are unacceptable to lenders. Projects risk going bust or loans falling into arrears if deadlines are neglected. Proactively communicate any hiccups to lenders and have secondary sources available in case of emergencies. Adherence to timelines ensures the capital is profitably turned over per agreement.
5. Maintain Open Communication
In addition to timeline updates, borrowers need to stay in consistent contact with lenders throughout loans. This keeps both parties on the same page as projects evolve. Providing status reports and addressing any questions or concerns proactively builds rapport and good faith. Radio silence risks damaging relationships and sowing seeds of distrust. Open books and transparency keep hard money flowing smoothly until terms are fulfilled. The initiation of open dialogues also makes renegotiating terms more amicable if inevitable roadblocks materialize along the way.
6. Have An Exit Strategy
Before securing a hard money loan, consider end goals and have a clear exit strategy in place. This may involve refinancing with a traditional lender, selling the rehabbed property, or generating income from a new business venture. Loans are meant to be short-term bridges providing capital injection until an “exit ramp” presents itself. Without a strategy, borrowers risk falling into cycles of rolling over balloons and accumulating unsustainable debt loads with penalty interest. A mapped-out plan ensures the capital is gainfully employed on timelines that benefit both parties.
7. Maintain Prudent Personal Finances
While real estate and business loans offer access to bigger pools of money, personal finances still matter greatly. Borrowers’ creditworthiness, income stability, and lack of existing obligations increase the chances of securing optimal terms. Late payments on other debts damage trustworthiness. Overextending personally on project startup costs or living expenses strains capital and increases the chance of default under pressure. Live within or below means to appease lenders and avoid taking on too much risk. Cushioned personal finances bode well for real estate ventures too.