Peter Pays Paul

Not many mortgage brokers live consistently in the world of hard money. It is a subject despised by some and feared by others. When I call on brokers for the first time, many of them report, “We don’t do that here.”

I believe commercial mortgage brokers, often times, don’t understand the role hard money lenders can play in serving their clients. Anything new can be intimidating. Especially, something that if not handled carefully can injure your business. Hard money is like a sword: wielded by an experienced broker it is a valuable tool. Wielded recklessly by an amateur, the user is likely to lose a limb or a valuable client.

Below are some hard money hints to help you avoid cutting off a limb.

1. Beware of application fees. Most hard money lenders will require a good faith deposit or an application fee. This when used properly protects you the broker and the lender from a “window shopping” borrower. A good lender will refund this deposit if the loan is not funded, less any expenses incurred by the lender for legal fees, travel, appraisal, etc. However, there are some unscrupulous lenders that collect application fees as a source of revenue with no intention of refunding the fee. Others charge a due diligence fee to even review the loan scenario and underwrite the loan.
2. Beware of hard money brokers. Some hard money “lenders” are really hard money brokers. By this I mean that they do not personally or corporately directly lend the money. They have a list of investors that they broker deals for. These investors may have anywhere from $25,000 to millions to invest in trust deeds or mortgages secured by real estate. Each of the investors has a different appetite for property types and individual lending ability. The “lender” matches the loan request with the proper investor or investors. Sometimes a loan is too big for one of the investor and multiple investors must be sought.
   This may cause problems on larger deals or when time is of the essence. It takes time to match borrowers to investors. Investors may want to review the underwriting themselves. This can delay the loan process until the contract has expired and your client has lost their deal. You may have lost the client.
3. Beware of staged construction funding. “Staged” funding occurs when the “lender” cannot raise enough capital initially to fund the entire cost of the construction loan. The lender is betting that as construction is completed they can raise the additional capital to fund the balance of the construction loan. This tends to happen more frequently with hard money brokers described above. The danger arises when a “lender” cannot raise the additional capital required to complete construction. Your borrower is left with a half-finished project and no money to pay for the remaining construction.
   Often whatever the total amount of funds initially obtained by the “lender” is deposited into an account accruing interest at the borrower’s expense. The borrower has not used the funds, but the borrower is already paying interest on those funds. This is because the “lender” has promised a return to the investor and must start charging interest to maintain that return. Most banks and some hard money lenders only charge interest on the amount of funds used, not on the total loan amount.
4. Cheaper is not always better. I had a boss that consistently told me “Peter, you get what you pay for. You pay for quality, you get quality. You pay less, you get less quality.” This axiom, though not always true, is often true. Though, you may get the loan for a lower price or lower rate, what is being sacrificed to achieve a lower rate? Can the lender perform on time? What is the hard money lender’s reputation? Can they guarantee the funds will be there? Will they be true to their word when it comes to the closing table?
5. Make friends with a hard money lender. You never know when one of your clients is going to need money in a hurry or have a problem with their credit. If you can’t get the deal done for them, your client will look for someone that can. You may not need a hard money lender more than once a year, but it will be nice to know who to call. It never hurts to close one more deal a year.
6. Don’t charge an exorbitant fee, because it is “hard money”. Lenders have underwriting criteria and a risk tolerance level. If a client is willing to pay a broker 10 points to place a hard money deal, something might be wrong with the deal. We tend to raise our eyebrows a little. Please understand that in know way do lenders begrudge you making a commission. Understand that from the lender’s perspective you are not undertaking risk warranting 10 percent of the loan amount. You provide a valuable service and should get paid, just don’t be miffed if lender’s are turned off by a large broker fee.
7. Avoid daisy chain loans. A deal comes across your desk from another broker, who got it from another broker, who got it from another broker, so on and so forth. Usually, every commercial broker in the chain wants a fee and the borrower or lender gets cold feet. These deals can be extremely frustrating because there is a lack of control. If you are the last broker on the chain, you get whipped back and forth by the other end. It will save you a lot of stress and time to avoid the majority of these deals.

This list is by no means exhaustive. It is meant to be a useful tool to get you on the right track to using hard money wisely. I hope that it does.

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