How do you negotiate a hard money loan for a fix-and-flip? (2024)

Before you approach any hard money lender, you need to have a clear and realistic budget for your fix-and-flip project. This includes the purchase price, the rehab costs, the after-repair value (ARV), the holding costs, the selling costs, and the expected profit. You also need to have a detailed scope of work, a timeline, and a contingency fund. Having these numbers ready will show the lender that you're serious, prepared, and professional, and will help you negotiate the loan amount, the loan-to-value (LTV) ratio, and the loan-to-cost (LTC) ratio.

Not all hard money lenders are the same. Some may specialize in certain types of properties, locations, or borrowers, while others may have different criteria, rates, fees, and terms. You should shop around and compare at least three to five hard money lenders before you choose one. Look for lenders who have experience and reputation in your market, who offer competitive and transparent pricing, who can close quickly and reliably, and who are willing to work with you and your goals. You can find hard money lenders online, through referrals, or through local real estate investor groups.

Once you've narrowed down your options, you can start negotiating the terms of your hard money loan. The main terms you want to focus on are the interest rate, the points, the fees, the term, the prepayment penalty, and the draw schedule. The interest rate is the percentage of the loan amount that you pay monthly as interest. The points are the percentage of the loan amount that you pay upfront as a fee. The fees are the other charges that the lender may impose, such as origination, appraisal, inspection, or closing fees. The term is the duration of the loan, usually between six to 12 months. The prepayment penalty is the fee that the lender may charge if you pay off the loan early. The draw schedule is the plan for how and when the lender will disburse the funds for the rehab costs.

To negotiate the best terms, you need to leverage your strengths and minimize your weaknesses. For example, if you have a strong track record of successful flips, a high credit score, a large down payment, or a low LTV or LTC ratio, you can use these factors to lower your interest rate, points, or fees. If you have a weak or no flipping experience, a low credit score, a small down payment, or a high LTV or LTC ratio, you can compensate by offering more collateral, bringing in a partner or a co-signer, or accepting a shorter term or a higher prepayment penalty. You should also be flexible and realistic about what you can afford and what the lender can offer.

Before you sign the contract, you should review it carefully and make sure you understand all the terms and conditions. You should also have a lawyer or a trusted advisor look over the contract and point out any red flags or potential issues. Some of the things you should pay attention to are the loan amount, the interest rate, the points, the fees, the term, the prepayment penalty, the draw schedule, the default clauses, and the exit strategy. If you have any questions or concerns, you should ask the lender to clarify or modify them. You should also be prepared to walk away if the contract is not in your best interest or if you feel uncomfortable with the lender.

Once you're satisfied with the contract, you can close the deal and get your hard money loan. You should have all your documents and funds ready to avoid any delays or problems. You should also maintain a good relationship with your lender throughout the loan term, and communicate regularly about your progress and any challenges. You should also pay your loan on time and according to the agreed schedule. Finally, you should have a clear exit strategy for how and when you will repay the loan, either by selling or refinancing the property.

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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