How Hard Money Lenders Evaluate Deals

by | Feb 6, 2019 | Financing and Loans

How Hard Money Loans Work: Where Your Credit Score Takes a Backseat

Forget those rigid bank rules – hard money lenders operate on a different playing field. Here’s the inside scoop on how they decide if your deal is a winner:

It’s All About That ARV (After Repair Value)

Picture this: You’ve found the perfect fixer-upper. Tons of potential, amazing neighborhood, priced to sell because it looks like a disaster zone. You run to your trusty bank, excited… and walk out with a big “no” and a lecture about your less-than-perfect credit score.

Enter the hard money lender: They see things differently. Instead of getting hung up on your past financial stumbles, they’re laser-focused on the property’s future. Here’s how their mindset works:

  • ARV is King: They’re assessing what the property will be worth after you work your renovation magic. A high ARV means they can lend confidently, knowing that even with a slightly riskier borrower (thanks to that credit score…), they’re protected if the renovated property sells for a great price.
  • Potential, Not Perfection: Peeling wallpaper, outdated kitchen, overgrown landscaping… those cosmetic issues don’t scare them off. They understand that savvy renovations transform a “dump” into a cash cow.
  • The Bank’s Loss, Your Gain: Traditional banks hate uncertainty. Properties that need work fall outside their comfort zone. This means less competition for those diamonds in the rough, allowing you to potentially snag an awesome deal that other buyers couldn’t finance.

But Let’s Be Real – It’s Not ALL About the Property: Hard money lenders do consider your creditworthiness, but it’s a piece of the puzzle, not the whole picture. A strong plan and some experience to back it up can mitigate a less-than-stellar credit score.


But What Does a “Well-Researched Plan” Actually Look Like?

Think like a savvy investor, not an HGTV wannabe. Your plan is the key to getting that lender excited. Here’s the must-haves:

  • Scope of Work: Detailed breakdown of renovations, materials… don’t skimp here!
  • Realistic Timeline: Be honest about how long things take, factor in delays.
  • Proof of Profit: Comps (recently sold, renovated properties) back up your ARV estimate.
  • Your Finances: Show how much skin YOU have in the game: down payment, projected profit, and how you’ll sell/rent).

LTV: The Money You Need to Bring to the Table

Think of a hard money loan like buying a powerful tool. It gets the job done, but you need to invest something yourself to use it. That’s where LTV and your down payment come in.

  • LTV (Loan-to-Value): This is the percentage of the property’s value the lender is willing to finance. A typical range is 65-75%, though stellar deals might get a bit more. The rest? That’s YOUR responsibility.
  • Your Skin in the Game: That down payment isn’t just about having some cash. It shows the lender you’re serious. You’re not expecting to get rich on their dime alone – you have something to lose too if the project flops.

Here’s why LTV matters even if you have plenty of cash:

  • Risk Mitigation: Lenders want to be protected. By requiring some borrower investment, they lessen their risk if the property doesn’t sell for as much as planned.
  • Focus on Good Deals: Requiring a down payment forces you to be picky about projects. You won’t rush into something mediocre just because you can get easy financing.
  • It’s Not ALWAYS Set in Stone: Rock-solid deal, amazing ARV potential, stellar track record? Some lenders might budge on the LTV for exceptional projects. But don’t expect this as the norm.

Let’s Do Some Math:

Say you find a property with an ARV of $300,000. With a 70% LTV, the hard money lender might loan you $210,000. You’d need to come up with a $90,000 down payment.


The Hard Money “Appraisal”: It’s About the Future, Not the Flaws

Forget that stuffy bank appraisal focused on every crack in the paint. Hard money lenders want to see YOUR vision for the property:

  • Flipper Mentality: They’ll study your plan, compare it to recent sales in the area, and make sure your upgrades maximize profit potential. It’s all about the ARV!
  • Experience is a Plus, Not a Must: Don’t be intimidated if you’re new! A detailed plan can overcome a lack of track record. The right lender will be a partner, offering insights to make your project a success.

Can Hard Money Be Used for Projects with Multiple Phases?

Sometimes! If your deal needs funding in stages (purchase first, major addition later), find a lender upfront who does “draw” schedules. Be transparent about your plan to avoid surprises.

Wait… Will Lenders Actually Say “NO” to My Deal?

Let’s be honest, the world is filled with shady lenders happy to take advantage and push you into a deal that’s just setting you up for failure. That’s why finding a reputable hard money lender is crucial. Here’s the thing that might surprise you: sometimes the best lender is the one that says “NO”.

Think of a good hard money lender like a tough but fair coach. They’re not there to just cheer you on blindly. They want to see you succeed in the long run, which means being honest about which plays (properties) are worth the risk.

Here’s why a “no” can be a blessing in disguise:

  • Protection from Yourself: Sometimes, in the excitement of finding a potential flip, we overlook red flags. A good lender analyzes the deal with a cool head, spotting issues you might be too emotionally invested to see.
  • Avoiding the Money Pit: Some properties are just nightmares waiting to happen. Major structural issues, environmental hazards… those renovations quickly eat into your profits. Better to walk away now than lose thousands after you’re in too deep.
  • They Value Their Reputation: Reputable hard money lenders want repeat customers, not foreclosures. If they turn down your deal, it’s likely because they see a high risk of it not panning out for ANYONE, not just you.
  • Building a Relationship: Even if this deal gets a “no”, a good lender will explain WHY. This builds trust and shows they’re invested in your growth as an investor, even if it means not getting your business this time.

But, How Do I Spot the Good Guys?

Look for lenders who:

  • Are transparent about their reasons for rejection – vague “bad feeling” isn’t enough.
  • Are willing to offer insights to help you find better deals in the future.
  • Have a track record of successful projects and happy clients.


Okay, But Isn’t It In Their Interest for Me to Default?

Picture the stereotypical “evil lender” from a movie – gleefully rubbing their hands together, waiting to snatch your property. That’s the OPPOSITE of most reputable hard money lenders. Here’s why foreclosure is actually a lose-lose scenario:

  • It’s a Time Suck: Foreclosure is messy. There’s legal paperwork, managing the property while it sits empty, finding a new buyer… All this time, the lender isn’t making money on new loans.
  • Costly Complications: Lawyers, property maintenance, lost potential interest income… foreclosure adds up. Often, lenders don’t even recoup the full amount they loaned out, even if they sell the property.
  • Bad Reputation: Investors talk. A lender known for a high foreclosure rate won’t attract many new borrowers. Reputable lenders want to build a base of successful clients who keep coming back for more projects.
  • Missed Opportunities: A successful project means a happy borrower who gets the loan paid back on time. That frees up the lender to fund your NEXT deal, and the next, creating a mutually beneficial relationship.

Think of it like this: Would you rather work with a coach who wants to see you win championships, or one who secretly hopes you break your leg so someone else can get on the field?

A good hard money lender sees themselves as part of your investing team. They profit when YOU profit. Their success hinges on helping you make smart deals, avoid pitfalls, and build a thriving real estate business.


Red Flags to Watch Out For

Not all lenders are created equal. Steer clear of those who:

  • Pressure you to sign before you fully understand the terms
  • Have hidden fees or unrealistic interest rates
  • Refuse to share references from past borrowers

Let’s Get Specific!

Got a potential deal in mind? Want to see how hard money makes the numbers work? Contact Intrust Funding today – we’re ready to help you make those investment dreams a reality.

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