Comparing Hard Money Lenders? Ask About Vertical Integration in Loan Processing

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When hard money lenders lend capital to real estate investors, the "hard asset" (the property) that is being financed serves as collateral on the loan. Hard money lenders typically have more lenient credit qualifications than conventional mortgage lenders, and the loan terms are most often based on the value of the property after it is improved by the investor. This lending model, also referred to as "private lending" or "private direct lending" is preferred by real estate investors who are seeking fast funding with minimal restrictions on property condition. Working with a private lender can be smooth sailing for a real estate investor, but it is essential that you vet your lender thoroughly to have clear expectations of the quality of the lending relationship you are signing up for.

If you are an experienced real estate investor, you have likely been asked all of these questions by your lender:

How many successful projects have you completed?

What is your exit strategy on this loan?

How is your credit history?

Have you filed bankruptcy in the past?

Have you had any mortgage loans that ended in foreclosure?

Do you have sufficient cash reserves to complete your project?

Being asked these kinds of questions can make the relationship between borrower and lender feel one-sided, but it's important to keep in mind that inviting a lender to your project makes you partners in a business relationship. The lender is providing capital for your project, but you will be bringing your money, skills and reputation to the deal as well--and your ROI is on the line.

Selecting the best private lender for your fix and flip, ground up or rental investment requires that you underwrite your lender as your lender is underwriting you. A lender should not mind answering any and all questions you have about the way they do business. These are just a few of the more obvious questions you are likely asking prospective lenders:

Are you a broker, or are you the direct lender?

Are you licensed?

‍How long have you been in the private lending business?

What is the source of your loan funds? Can I rely on funding?

What interest rate, points and fees will I pay? Are these negotiable?

Can I extend the loan term if necessary?

Is there a fee to pay my loan off early?

These are obviously important questions, but while you are vetting prospective lenders, be sure to ask some not-so-obvious questions that will help you to determine  the degree of vertical integration in the lender's business model.

If the term "vertical integration" is new to you, an easy way of thinking about it is like the steps on a ladder that lead, ultimately, to the payoff of your loan. The bottom step of the ladder is your loan application, and there are dozens of integrated steps in the process from initial application, to funding, to final payoff. If a lender's business model is vertically integrated, most if not all of the steps on the ladder to payoff are handled in-house. This means you do not have to rely on multiple outside vendors for the successful approval, funding and payoff of your loan. To the degree that a lender's internal processes are vertically integrated, transparency, efficiency and speed are maximized.‍

Below are some critical questions you should be asking to determine the degree of vertical integration you can expect from the lender you are considering:

From application to funding, what is your underwriting process?

The answer to this question will reveal right away how much transparency to expect in your relationship with the lender. Ask specifically where the "pain points" might be for you as a customer. How sophisticated is their fintech? What does the borrower approval process look like? What is the turnaround time for a loan estimate? Can you upload documents to their website or will you be emailing or mailing them in? Answers to these kinds of questions will reveal whether you can expect a streamlined process or multiple delays along the way. Ask the lender what happens if an outside vendor takes too long to complete a critical task. For example, can the lender fund your loan if your SFR appraisal is delayed? If the lender has an in-house valuations team that can accurately estimate the home's AIV and ARV, your appraisal delay shouldn't delay the funding of an SFR loan.

Who will service my loan?

Loan servicing includes providing accurate, timely loan statements, collecting payments, monitoring and collecting tax and insurance payments, remitting funds and more. You should know if you will be dealing with another company for these services. Will the outside servicer be remitting your construction draws? What is the turnaround time for reimbursement of construction costs? If your exit strategy hits a bump, can you expect the servicer to work with you on a successful outcome? The question of servicing is a critical one, and you should know the answer to this before you step one foot on a lender's metaphorical ladder.

How will I contact loan processing and loan servicing personnel?

Anchor Loans is unique in our approach to customer service. From day one, our customer is assigned a dedicated loan processing team that the customer can call and email directly. Our borrowers do not call an 800 number to wait on hold for a representative. When selecting a lender, be sure to ask clear questions about this aspect of the borrower/lender relationship so you can have clear expectations up front. If a wire does not arrive on time to your bank, can you speak with your processing team immediately to have the issue resolved, or will you wait multiple days to hear back from someone?

The answers to these questions will determine what your working relationship with your lender will look and feel like. Keep vertical integration in mind in your search for a real estate investment lender, and you will get all the clarity you need to make an informed decision.

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