Some hard money lenders are not extremely fussy about whom they lend to. They make their money by taking on as many projects as possible and generating high yields through higher rates. Others prefer to accept lower yields in return for landing high quality borrowers. They make their money from higher value projects and long-term relationships.
So, who are these quality borrowers? Where do they come from? Most importantly, what does it take to be considered a quality hard money borrower worthy of the best deals? Salt Lake City’s Actium Partners provides the answer.
The Two Most Important Things
Actium Partners says that hard money lenders look at a number of things to determine a borrower’s quality. But there are two factors that stand out among the rest. If a borrower is strong on these two things, the chances of landing a good deal on a hard money loan are pretty good.
1. High-Value Collateral
Funding decisions in the hard money game are based almost entirely on collateral. Borrowers offer assets as collateral to cover the loans they obtain. In order to be approved, a borrower’s collateral needs to be valued substantially higher than the amount being sought.
A quality borrower is one that brings high-value collateral to the table. Given that the majority of hard money is for real estate, imagine an investor looking to obtain a piece of property valued at $500,000. He goes into it knowing that the lender’s LTV is 50%. Between his own cash and other revenue sources, he can manage to put down $300,000. He is now asking for less than the LTV on a high-value property. That makes his lender very happy.
2. A Solid Exit Plan
High-value collateral is the starting point for any hard money deal. But Actium says that borrowers are also expected to come to the table with an exit plan in place. What is an exit plan? It is a reasonable plan for paying off the loan when it comes due.
It goes without saying that some exit plans are stronger than others. Unfortunately, there are borrowers who come looking for hard money or real estate bridge loans without any exit plan at all. They generally don’t succeed in getting their loans.
On the other hand, a solid exit plan tells a lender that a borrower has thought things through. A solid exit plan is an indicator of experience, knowledge, and business savvy. Needless to say that lenders love a solid exit plan. Combining a solid plan with a high-value asset turns an average borrower into a quality borrower.
Quality Borrowers Generate Better Returns
Hard money lenders appreciate quality borrowers because they tend to generate better long-term yields. A quality borrower presents a lower risk. As a result, he enjoys lower rates and terms. Provided all goes well, the borrower returns to that same lender time and again. He benefits from good deals while the lender earns solid returns on every project it funds.
A hard money lender who cannot seem to land quality borrowers has to take a bit more risk. That risk is offset by less attractive rates and terms. Unfortunately, the lenders rates and terms cause quality borrowers to go elsewhere, leaving the lender in a position of having to work with less favorable borrowers.
If you are a hard money borrower, do you know whether your lenders consider you a quality borrower? To achieve quality status, you need to bring high-value collateral and a solid exit plan to every deal. That is the bare minimum.