The Borrower-Lender Relationship: How to Choose the Lender That’s Right for You

As a real estate investor, you may have had quite a few good, and maybe not-so-good, experiences with fix-and-flip lenders over the years. Or, if you are new to the business, you might have heard stories of fix-and-flip financing that didn’t quite work out the way the borrower thought it would.

When you’ve made the decision to use borrowed capital for a real estate investment deal, it’s important to keep in mind that there’s no one-size-fits-all fix-and-flip lender.  I’m not here to tell you, specific lenders, that might be best for you, or which ones you should avoid—different lenders are good for different investors. But, do you know what to look for when choosing a fix-and-flip lender for your projects?

Three questions to ask when choosing a fix-and-flip lender

Of course rates, fees and terms are important considerations, but I’d like to share three not-so-obvious questions about the borrower-lender relationship you should ask when making your decision.

1) Will this lender add value to my team?

Many investors think that all lenders are pretty much the same. They charge similar points, they offer similar products, they qualify similar borrowers. So, what difference does it really make which one you work with?
Various lenders may seem quite similar up front, but when you dig deeper into how they operate — from application, to approval, to loan funding and payoff, you may find differences that better serve your specific goals, and can significantly affect your bottom line.

Take this example:

  • Lender A is offering you a $100k loan at 8% interest for a 9-month term.

  • Lender B is offering you a $100k loan at 9% interest for a 6-month term.

Of course, everyone is looking for lower interest rates, but 8% interest for 9 months will cost you more than 9% for the shorter term. Digging deeper will help you decide which lender might be the better choice. Will Lender A charge you a prepayment penalty if you complete your project in four months and pay off your 9-month loan early? Will Lender B’s approval and funding procedures include unnecessary delays that lead to a costly loan extension past the original 6-month term? These are important considerations when researching lenders.

Most important to keep in mind is that anything that delays your project will end up costing you money. A lender’s commitment to prompt customer service is a must. Time you spend waiting to hear back from your lender is time you could spend moving your project toward completion.

My advice? Look beyond the obvious and make sure you’re adding an experienced, dependable lending partner who knows your goals and is committed to helping you succeed.

Ask yourself: Is this lender helpful in expediting the approval process? Are they asking for things that make sense? Are they delaying the process unreasonably? Will I work with one dedicated account executive, and will he or she bring expertise to the table that supports my goals?

If you agree that choosing the right lender matters, the next step is vetting your prospective lender to make sure your expectations match the services they can provide.

2) Does the Lender Meet My Standards?

You should always underwrite your lender, just like a lender underwrites you.

Every lender is going to ask you a series of questions. Here are a few common ones that I’m sure you’ve heard before:

  • How many projects have you successfully completed?

  • What is your exit strategy for timely repayment?

  • Have you had any foreclosures?

  • What does your credit history look like?

  • Do you have enough cash reserves?

The borrower/lender relationship can often feel one-sided. Remember that you have an equal part in this relationship. You are putting skin in the game and it’s your deal on the line. Your lender will benefit from lending you money, so make sure they come to the table as a partner with your best interests in mind.

My advice? Write a list of questions and expectations for your lender. Here are a few helpful starter questions:

  • How many days will it take from application to funding?

  • Will I work with one account executive dedicated to my projects?

  • What type of fintech supports your processing and how does it benefit your borrowers?

  • What is your policy on loan extensions?

  • Do you charge a fee for early payoff?

  • What sets you apart from other lenders?

Evaluate how well the lender can communicate that information to you and take note of how they feel about your due diligence. If you get the impression you are out of line for questioning their business practices, that may be a red flag. Your lender should respect and appreciate your interest in how they can best serve your needs.

If you’d like to hear more of my perspective on how to underwrite your lender, check out my interview here.

3) How do I decide which fix-and-flip lender will make the best partner?

Every lender is going to tell you they’re the best out there, but as a borrower/real estate investor you have a lot at stake. Make sure you are working with a lender that focuses on your success.

Here are some ways you can find a lender that works for you:

Test different lenders

If you have multiple property deals, test out different lenders for each project and compare experiences. Keep in mind the key questions you should ask and what kind of service you can expect.

Learn from your Network

Network with other investors and ask them the pros and cons of the lending partners they’ve chosen. Online reviews are a resource, too, but many times online reviews skew negative, so be sure to get some one-on-one feedback from professionals you know and respect.

Seek Testimonials

Ask lenders you’re vetting to put you in touch with some of their clients who would be willing to answer questions you have about their borrower experience.

In this business, investors are required to study housing trends, estimate property values, and do their homework regarding the markets they’re operating in. Finding a lender is no different.

Conclusion:

I hope you understand that you have an equal part in the borrower/lender relationship. Lenders want you to have skin in the game so you are committed to a successful end result. It’s a fair request from lenders, but you need to make sure that they are focused on your success as well.