The most important questions a lender will ask on any hard money loan or private money loan.

The most important questions a lender will ask on any hard money loan or private money loan.

Why do you want the loan?
If it is a project. How will you collateralize it?
How do you intend to cover the debt service?
What is your exit strategy?

Why do you want the loan?- How much do you need? How much have you already spent on the project and how much more cash do you have to invest?

If it is a project. How will you collateralize it?- The subject property alone may be fine. Or, depending on LTV, other collateral may be necessary. If there is additional collateral, please tell us what it is, estimated value, if there are appraisals and when they were done, along with any current loans. LTV Guideline Raw Land – 25% to 30% LTV (untouched, fully entitled, and construction projects in process fall into this category) Existing Structures – 50% to 60% LTV (65% in extreme cases. Existing structures have certificates of occupancy and either need tenants and TI’s in the case of commercial property, are up, running and generating an income or in the case of residential are ready to move in or have tenants.

How will you cover the debt service? – How much discretionary income (income less expenses) do you, your group or company have to pay the monthly loan cost? For a quick monthly payment estimate, use 12% IO as a basis. Private money generally runs from 9% to 16%, but this is an easy way to estimate a payment without a calculator. For instance: $1,000,000 loan at 12% IO would cost $10,000 per month. Interest Reserves – Many investors will give them, however, even the ones that will, want to know that you can cover the debt without them.

What is your exit strategy? – How long do you need the money and how will you pay it back? The stronger that this statement is, the better. Getting a project built and then looking for conventional financing, while feasible, is not a very strong argument. In some cases that is reality and does make a lot of sense – For instance, you are buying an existing building, doing TI’s and you have tenants ready to move in. Once those tenants are seasoned a conventional lender should replace this take out financing with a conventional loan.

What if your project doesn’t conform to the parameters above?  Ask the lender to become an investment partner. Joint Venture investors are harder to come by than traditional private money investors but they do make up for insufficiency’s if you are lacking initial collateral or the ability to cover debt service. The biggest consideration with JV partners is how much of your project are you willing to give up? That is usually a function of how much cash you have in the project and how much more you have to put in. Unfortunately equal equity does not guarantee an equal share in your project. Different investors have different appetites for what percentage of a project they will want for their investment, based on the risk and the eventual return, but be prepared for an investor wanting a greater percentage of your deal than their money equals.

The Hard Facts – Some of your deals will make sense in the current market and be fundable. Some of you will read this and think it is a bit harsh and unreasonable. Well, allow us to share something with you. There are investors and investment groups that will tell you they can fund your deal whether it meets the parameters above or not. Be careful of the ones that ask you for large fees up front for “due diligence” or “commitment fees” or even high cost appraisals and legal fees in advance of funding your loan. There are firms that make a living from these fees, cherry pick deals and rarely, if ever, fund anything. The only commitment that should be asked from you is a fee agreement and limited exclusivity that says you will pay if and only if  the  lender actually gets you a loan.  You should not be asked for up front fees in most cases. Investors generally fall into 3 categories. Those that charge no up front fees at all, those that charge minimal fees ($2k to $5k) to cover travel expenses and processing and those that charge $10k to $75k or more for all sorts of reasons; some legitimate and some not depending on the size and location of your project. Certain expenses are reasonable; travel costs to visit the site, updated or new appraisals, even lodging, meals and ground transportation if the site of your project is not close to them. If you do not want to pay these fees I suggest getting a lender that is close to the property.

Hope this helps