As published in Scotsman Guide's Commercial Edition, October 2007.
The hard-money lending process is less standardized than traditional lending. Borrowers may be uncomfortable with the fast-moving, seemingly unpredictable process.
You can enhance your relationship with borrowers by educating them on how the process works. To do so, you must be actively involved throughout the transaction and be available when clients have concerns.
The lender dynamic
Your borrowers will have to prove to lenders that they can execute their projects within a tight timeline and that they have prior experience in overcoming obstacles. Your role is to help them demonstrate the strength of their collateral and development plan.
Sometimes, you'll have to ask borrowers to provide the potential lender with in-depth information about their project. Your clients might be concerned that the lender is seeking information because it's competing for the project. Remind them that the company is in the business of lending, not developing real estate. The lender is requesting this information as part of its decision-making process.
You will also need to ease their concerns about upfront fees. Forwarding money without a guarantee of a loan can be unnerving for borrowers, so prove to clients that the lender has a history of funding as promised.
It's also helpful for clients to have assurance that the lender has a good reputation. You can offer this by collecting references from previous borrowers, service-providers and others who can attest to the company's expertise.
Finally, borrowers will probably want to know the availability of the lender's resources. Different lenders have different sources of funds -- some available more quickly than others. By understanding these lending sources, you can demonstrate to your borrowers that you have selected the appropriate lender for their needs.
Steps in the process
Borrowers don't always like getting a term sheet from a hard-money lender. Hard money isn't cheap, and the interest rate and points can be a shock.
Prepare them for the cost before they get the term sheet. This sets appropriate expectations and allows the process to proceed more smoothly. After all, borrowers who try to negotiate their term sheets endlessly are likely to end up with the cheapest money of all -- none.
The underwriting and review process should begin quickly after the borrowers sign the term sheet. The clock is often ticking at this step in the transaction, and the borrowers may get nervous. Facilitate the flow of any additional information between the lender and your clients to the best of your ability.
If the lender agrees to fund the loan, it should issue a commitment letter promptly. These letters can take a variety of forms and may be conditional. Borrowers should also have a lawyer review this paperwork. Once you, your clients and the lawyer are satisfied with the commitment letter, be sure that it's signed and returned to the lender without delay.
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Borrowing hard money can be a challenge, but it doesn't have to be painful. Securing these funds for your borrowers generally enables you to get paid twice: first on the loan, then on the long-term financing or other exit strategy.
Select lenders carefully, though. One bad experience might lose you borrowers and damage your reputation.
Benjamin W. Shoval is a co-founder of Ambit Funding. The firm provides financing for transitional periods of time for real estate projects.
Ambit works with mortgage brokers to provide bridge loans from $3 million to $25 million and equity investments (including preferred equity) from $1 million to $10 million. Ambit's collateral and asset types include many kinds of real estate throughout the United States and Canada. Contact Shoval at email@example.com or (570) 829-2101.