Hard money loans are a quick and easy solution if you’re looking to fund real estate projects that generally can’t be funded by traditional lenders.
Getting the best terms can make all the difference in the profitability of your investment—but how can you achieve this? Here’s how to negotiate the best deal.
Know the Basics
Before you start negotiating, you need to know how hard money loans work. What makes hard money lending different than traditional loans is that the loan amount is based on the value of the property used as collateral, not your credit history. Hard money loans also have higher interest rates and shorter terms, typically between 6 months and 3 years.
It’s best to have a thorough understanding of hard money loans, including their pros and cons, and you should also keep up with loan-related news or updates by reading market articles. That way, you can approach negotiations with realistic expectations but still get the terms that work for your financial strategy.
Research the Lenders
Not all hard money lenders have the same requirements or loan structures, and they’re not all equally willing to negotiate. So rather than settling on the first lender you find, take some time to research all potential lenders in your area and compare their interest rates and fees.
It’s also a good idea to talk to other real estate investors in your network, which will give you a firsthand understanding of which lenders are flexible and trustworthy. The more you know, the stronger your negotiating position will be.
Show a Solid Investment Plan
Lenders are more likely to give you better terms if you show them that your project is low-risk and well-thought-out. So before you apply for a loan, make sure you have a solid investment plan that includes the purchase price of the property, the estimated renovation costs, the projected resale value, and your timeline.
If you have experience with similar projects, or you’re partnered with contractors and real estate professionals, this will add to your credibility and make lenders more willing to negotiate their interest rates or repayment terms.
Negotiate Interest Rates, Fees, and Repayment Terms
When you apply for a hard money loan, you’ll have the opportunity to negotiate the loan’s interest rates, fees, and repayment terms.
Hard money lenders expect you to pay higher interest rates than traditional financing, usually around 8% to 15%. But these rates aren’t set in stone. If you can prove you have a history of successful projects or you can put down more money, lenders are more likely to reduce the rate for you.
As for fees, ask for a breakdown of all fees and challenge any that seem excessive. Some lenders will waive or reduce their fees if they see you as a long-term client.
Finally, while the repayment term for hard money loans is shorter than traditional loans, the flexibility you’ll have can vary. If the standard repayment term doesn’t match your project timeline, ask about extending the loan term or structuring payments to fit your cash flow.
When to Walk Away
Hard money loans can be really useful, but not all deals are worth doing. If a lender won’t give you the terms you want for your project’s financial goals (and, importantly, you know that your requirements are realistic), don’t hesitate to walk away.
There are dozens of lenders out there, so there’s no need to settle for bad terms. Know when to say no—this shows you’re serious about getting a deal that works for both parties.
