It wasn’t so long ago that hard money lenders operated on the fringes of mortgage lending. Today, hard money lending is very much mainstream, at least for investors. Although these loans are still a small portion of overall originations, the best hard money lenders in the industry have moved from the shadows into the light using a combination of education and coaching for their borrowers.
Toby Potter is the president and CEO of Global Integrity Finance, a direct hard money lender for real estate investment properties such as fix and flips, ground up construction projects, or multifamily and mixed use rehab buy and holds.
Given the popularity of real estate investment projects and fix and flips in particular over the past seven or so years, Potter said that they see a lot of clients who have jumped onto that bandwagon with both feet and are trying to play in a space with other investors who are a lot more experienced. In a landscape with not as much viable inventory, these new investors are taking on properties that are less than ideal and operating with profit margins that are much thinner than a more seasoned investor would accept.
This is why it’s so important to work with a hard money lender who is just as invested in the investor as the investor is in the project.
“As a hard money lender, we are moving more into the educating, mentoring, and coaching phase because we see there are so many investors coming out that don’t have a clue,” Potter said. “They have an opportunity, they have some resources, they have some good credit, they have some good assets, they just don’t know what they don’t know yet. So we’re not just going to lend them the money; we’re also going to educate them, coach them, and ensure and guarantee success and profitability.”
The fix and flip space has exploded, and that’s one reason for the expansion of the number of real estate investment associations (REIAs) nationwide. These associations provide opportunities for new investors to learn and network with investors who are more knowledgeable about the space, as well as a space for new investors to meet potential mentors and partners.
But, Potter said, there are also a lot of smoke and mirrors out there, and even seasoned investors can get burned when working with a lender who is only focused on closing a deal, as opposed to those who are focused on funding good deals. The best hard money lenders want to take the new clients that they have, educate them and coach them through a couple of projects, thereby turning them into clients who are even more profitable and who will keep returning with more deals.
“The more successful our clients are, the more successful we become, and if we can create and establish and build a client for life, then we can minimize our overhead [on] advertisement and attaining new clients,” Potter said.
A borrower should look for lenders who have tools and resources on offer that will help ensure their success. Rather than shopping lenders to discover the ones who will say ‘yes’ no matter what the deal looks like, investors can benefit from listening to lenders who say ‘no’ because the deal isn’t a profitable one. No one likes being rejected, but that’s the difference between someone who wants to make a quick buck and someone who wants to make a good business decision. Sometimes those two circles will overlap; other times, they won’t.
Just as with any other business, hard money lenders want to work with investors who sees opportunities purely through a business lens and who are invested in getting the guidance and direction to keep the project from going off the rails.
Potter says that at Global Integrity Finance, this comes through in the process of analyzing a project. They show investors what their guaranteed profitability would be as long as they follow a specific blueprint based on the scope of the work, the appraisal and the inspection. If an issue arises and they see a borrower hasn’t budgeted for it, then they’ll have a conversation with the borrower about that, wanting to head things off “before disaster strikes.” Sometimes they get pushback, Potter said, but that’s when investors need to decide whether they’re serious about their careers and their business, and if they’re serious, then they tend to respect and listen to that guidance.
“I have a vault full of money, $200 million. It makes me no money sitting in a vault. The only way that money is of value to me is if I lend it out, and I want to lend it out on viable deals,” Potter said. “If I’m telling you no, I’m telling you no because a deal doesn’t work. I can show you why it doesn’t work, and then you have to either listen, respect it, and move accordingly, or you can hang up the phone and go somewhere else and make bad choices the rest of your life.”
The negative connotations around hard money lending are slowly being replaced by a different kind of messaging, largely due to this kind of education and coaching. The reasoning behind hard money lending is easier to understand for originators and investors alike, as well as the specific types of situations that hard money lending is intended to solve. Potter says that hard money lenders have become more respected in the industry because they’re simplifying the process for investors to be approved and they’re lending based largely on whether or not the property supports the debt.
“I see a lot of heartaches, headaches, and pain of newbies who get in and fail. They fail not because of the project, but they fail because of the lack of knowledge, of coaching. They just don’t know what they don’t know yet,” Potter said.