Ask Cornerstone: How do prepare a business plan to build trust with a hard money lender?
Hard money (HM) lenders do differ in how they lend depending on their business model, risk assessment methods, capabilities, and willingness to solve problems, but in most cases, they are equity lenders.
That means that they look at the size of your down payment and the quality of the property to protect their capital. Lenders want to know that if the borrower completely screws up and the lender must foreclose that there is enough equity to cover the cost of foreclosure, carrying cost, sale cost, and the cost of getting the property ready for sale. Some lenders don’t have the desire or resources/capabilities to take over an unfinished foreclosed project, so they require a large down payment to protect their loan in the case of foreclosure. Having more equity makes it more likely that the property will sell at an auction or they can wholesale it and still get their capital back.
At Cornerstone, we with smaller down payment because as a General Contractor, we can take over an unfinished project and recover losses in case there’s an issue that causes the borrower to default.
Given all this, there are two important documents to offer to lenders. First, to show your experience, we would recommend preparing one page summary of your last project to give to a lender. However, the most important factor is, find an excellent project and the money will find you. To demonstrate a project’s viability and value, use a “flip calculator” to plug in your costs and estimates. Many, including the one we offer at http://cornerstone-company.com/free-flip-calculator/, will create a 1-page summary and profit forecast of your project.