How to Decide Between Hard Money Lenders for House Flipping

Successful real estate investors who flip multiple properties at once, or house flipping entrepreneurs who are looking to quickly scale their businesses, often rely on hard money lenders for quick bridge loans to purchase and improve fix and flip properties.

Many hard money lenders in the marketplace provide bridge loan programs specifically designed to meet the needs of house flipping companies and individual flip investors. Choosing the best lender for your fix and flip business will depend on multiple factors—since different lenders are good for different investors. For this reason, it is critical to know these three important questions to ask:

Three questions to ask when deciding between hard money lenders

Once you are sure the hard money lenders you are considering are licensed to do business in your state, it is a given that you will be discussing terms, rates and fees with them, since the cost of borrowed capital will impact your bottom line.

Below are three not-so-obvious questions about the borrower-lender relationship you should be sure to ask :

1. Which of these hard money lenders will add value to my team?
   
2. Many house flippers are under the impression that all hard money lenders are essentially the same. Lenders seem to offer similar fix and flip loan products, they charge similar points and interest and they lend to similar borrowers. If this is the case, what difference does it make which hard money lender you work with?
   
   The truth is, although the hard money lenders you are considering may seem quite similar on the surface, when you probe deeper into their operations — from loan application to borrower approval, to loan funding and payoff, you will likely find differences that can significantly affect your bottom line.
   
   For example:
3. Lender A offers you a $500k loan at 9% interest for a 12-month term.
4. Lender B offers you a $500k loan at 10% interest for a 6-month term.
5. Of course, lower interest rates are important to your bottom line, but 9% interest for 12 months will cost you more than 10% for the shorter term. Asking the right questions will help you choose between hard money lenders to find the one that offers the flexibility that better serves your needs.
6. Will the lender who offers a lower interest rate also charge you a prepayment penalty? What if you complete your project in six months and pay off your 12-month loan six months early? Will the lender's application, approval, and funding procedures include lengthy delays that affect your construction schedule and lead to loan extensions down the road? These are important considerations when researching hard money lenders.
   
   While you are discussing a hard money lender's loan programs, ask yourself if the lender's responses to your questions give the impression that they will help expedite the approval process. Do they emphasize customer service as a priority? Are they asking you for things that make sense? Will you work with one dedicated account executive, and will that person have the expertise that supports your business goals?
   
   As an example of how different lenders may meet different needs, some hard money lenders offer a special loan product for borrowers who need to "close as cash" on a cash-only property purchase. With a close as cash loan product, the lender funds the property purchase quickly, assigning Title immediately to the borrower. The Grant Deed is recorded after escrow closes. This type of quick bridge loan is popular with experienced borrowers who buy properties at foreclosure auctions where they are competing with cash buyers.
7. These types of flexible products are a great option for house flippers who need to be able to depend on fast funding. It's important to keep in mind that anything that delays your project will cost you money and impact your ROI. A hard money lender’s commitment to prompt customer service is extremely important. Make sure you’re adding an experienced, dependable lending partner who knows your goals and is committed to helping you succeed.
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9. Does this lender meet my standards?Due diligence requires that you underwrite your lender, just like the lender will be underwriting you.
10. This simply means that every lender is going to ask you to answer mandatory questions to determine whether they want to do business with you. Here are some questions most borrowers are familiar with:
11. How many successful fix and flip projects have you completed?
12. What is your exit strategy on this loan? That is, what is your plan for repaying the principal when it is due?
13. Have you had any mortgage loans that ended in foreclosure?
14. How is your credit history? Have you filed bankruptcy in the past?
15. Do you have the cash reserves needed to complete your project?
16. These are good questions to ask someone you are going to loan tens or hundreds of thousands of dollars to. But, answering these questions can make the relationship between borrower and lender feel one-sided. You must remember you are an equal in this relationship. You will be bringing your money, skill, and reputation to the project. The success of your deal is on the line. A hard money lender benefits from lending you money, so they should communicate with you as an equal partner who has your best interests in mind.
17. Here is a list of important questions to ask your prospective lender:
18. What is your typical turnaround time from application to funding?
19. Will I work with one person who is knowledgeable about my business and my projects?
20. Is there advanced fintech that supports your loan application and processing? How else does your technology benefit your borrowers?
21. Do you offer loan extensions? How do your extensions work?
22. Will I be charged a fee if I pay the loan off before the full term is up?
    
    What if I am late on a payment? What can I expect?
23. Why should I choose you as my lending partner? What sets you apart from other hard money lenders?
24. Take notes during this conversation and evaluate how each lender communicates the answers to your questions. Note how they feel about you performing due diligence. If you are given the impression that you are not welcome to question their business practices, that is a red flag. A reputable, dependable hard moneylender should understand and appreciate your inquiry.
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26. How do I make my final decision between hard money lenders?
27. When you have narrowed your search down to a few lenders who might best help you to meet your specific business goals, a lender that prioritizes customer service and focuses on your business success is your best choice.

Here are some strategies you can use to choose a dependable lending partner:

Compare different lenders in a real-world test

If you are flipping multiple properties at a time, pick a few different lenders and test them out on different projects. Note the differences in the experiences and record throughout the process of how they excelled or missed the mark. This data will be invaluable when deciding on the best hard money lender to move forward with in the future.

Ask for testimonials

While you are deciding between hard money lenders, be sure to ask those you're vetting to provide contact information for a few of their clients who'd be willing to answer your questions about their borrowing experience and why they've chosen the lender they're working with.

Learn from others in your Network

Are you networking with other investors? Ask them about their experiences with the lending partners they’ve worked with. Online reviews are also a resource, but keep in mind that online reviews tend to skew negative. A satisfied customer isn't as motivated to review a lender as a disgruntled one, so as you are researching online, be sure to also get some feedback from colleagues in the industry whom you respect.