Working with a hard money lender isn’t rocket science. As long as you follow along with basic rules of real estate investing, your loan and your property should pan out as you expect. However, there are 3 terminal mistakes borrowers can make while dealing with hard money loans and investment properties that can immediately ruin a deal. Here are a few things to avoid.
Purchasing without a plan
Buying an investment property before you have a solid plan for it is never a good idea. Sometimes investors will purchase a property because they think it’s a good deal, then try to decide what to do with it. This is a recipe for terminating the deal. First, it’s important that you, as the investor, are at least a little familiar with the area you’re buying in. Home buyers in different areas have unique wants and needs for a home, which will affect how you should approach the design. If you purchase a property on a whim in an area you don’t know much about, you could end up creating a product that has no demand. Secondly, you must find a house that fits your plan, not the other way around. In order to successfully flip a property, or even to secure a private loan, your renovation plan has to be detailed and well thought out. Many private lenders will not give you the money you need until you provide information on the property as-is, your renovation plans, and an idea of the finished product.
Part of your plan must include an exit strategy. Many times investors see only one way out with an investment property: to rehab and sell. But this narrow thinking can lead to repairable mistakes such as terminated deals and lost finances. What if the house doesn’t sell? Or what if the market stalls? There are actually several ways to get out of a deal if the rehab and sell option doesn’t pan out. If, for some reason, that first plan doesn’t work out, your backup plan could be to offer a lease-purchase agreement, allowing a buyer to rent the property and give them the option to buy at a later date. At this point, you could also decide to hold on to the house as a rental property. Or, if none of these options work, you could also wholesale the property to another investor. You would most likely have to sell below market value, but you have the possibility to break even and not carry the monthly costs of the property and the loan.
Skimping on due diligence
Being an educated investor is half the battle when it comes to real estate investing. Once you know the area and what certain properties need to feature, flipping a property isn’t quite as daunting. By spending time to research properties and neighborhoods, you are creating a solid platform for a successful deal. You learn what kind of properties potential buyers are looking for, so you can provide exactly what they want. A big mistake is going into the deal blind and putting all your money into something that won’t sell. Here are a few tips on what to look for when researching a property or a particular neighborhood.
When obtaining a hard money loan, you are required to provide an estimated after repair value (ARV) of the property. Most lenders will complete an appraisal of the property. If your estimate of the ARV is drastically different from your lender’s, you may have to bring additional funds down at closing, which could kill your deal. Always reach out to a lender before you submit an offer, just to be sure you are comfortable with the financing requirements. A good lender will help you underwrite the deal and let you know whether it will be profitable.