In Part 2 of our Risky Business series, see more common mistakes that borrowers can make when utilizing hard money lending, and get tips on how to avoid them.
Value the Property: Be reasonable with the value of the property. Pushing the market by listing the property for a higher price increases the risk of the property staying on the market longer, causing a loss in profit for you.
Budget Your Money:
Cutting corners to save on the cost of a project may seem like a good idea initially, but neglecting some parts of the project can have serious consequences. For example, neglecting to pull permits, raises the risk for someone finding out and putting your project on hold. Investors should do everything possible to stick to their original plans. If you close a loan based on plans for a 4-bedroom home, but decide to change it to a 3-bedroom, the ARV will completely change. The comparables will no longer support the new value of the property, altering the value that the loan was originally based on. This will hurt your relationship with the lender and could even cause the whole deal to fall through.
Avoid Overextending Yourself: It’s easy to gain momentum with a project if it goes well, and you may immediately want to start another project. But if you spread yourself too thin with capital and capacity over multiple deals, you may be putting yourself in a situation where you will not have the power to continue working the deals, causing it to unravel and losing the money you put into it. However, if you do ever find yourself in this situation, you always have the option of wholesaling the property. This allows you to still make a profit on the property, but since you sell it to another party as-is, you don’t have to do any of the work involved with fixing it up.