There are different ways in which commercial real estate is financed, and one of the most common ways is commercial real estate loans. Hard money loans are one of those sub-options for financing a real estate property.
This is true because getting mortgage loans is quite risky, as in worst-case scenarios, you’re not able to pay off the loan on time, and your existing property can be taken away from you!
Some people’ve experienced worse conditions simply because they chose a mortgage loan and things didn’t end up well for them, as a result of which they had to be homeless for some time!
It is an extreme situation!
But yes, the statistics have it that such conditions are not as rare as you would think them to be.
You could potentially land up in a similar situation with your commercial real estate property too, if you don’t make the right decision for financing your real estate property.
So if you’ve done your research and homework and have decided to buy a property by raising a hard money loan, first of all, congratulations!
It is one of the options on the table for those who have difficulty obtaining conventional means of bank lending. But then, no plan is a foolproof plan!
Every plan has its own set of pros and cons. So raising a hard money loan does not eliminate all the risks associated with it!
There can be consequences where you’ll end up paying way more than you should have paid in ideal conditions if you don’t take enough care.
So here are the top 5 common mistakes that real estate investors make while financing a hard money loan! Read them all so that you don’t fall prey to any of the below consistently repeated mistakes!
Read on!
5 Common Mistakes
Not asking for the prepayment penalty rates and consequences in case of prepayment of the loan
These loans are offered to you not just to benefit you, but also to benefit the commercial real estate hard money lender himself by means of interest!
The interest you’ll be paying to your lender is the regular income for him, and when you prepay the loan amount, most of these lenders will charge a prepayment penalty rate as they’ll be losing out on the next installment’s interest simply because you’re clearing it up early!
Now, this is something you need to ask your lender! In 80% of cases, money lenders conceal this factor from you!
Especially the ones who’re too keen on closing the deal with you and concealing the prepayment penalty factor are the ones who wait for you to fall into their net!
There are instances when real estate investors have paid crazy loads of prepayment penalty rates.
And when brought to dispute, money lenders will easily slip away by pointing those terms were spoken of while signing the loan agreement.
So the burden of high prepayment penalty rates lies with the loan buyer!
So make it a note that you definitely ask about the consequences of prepayment of the loan and the penalty rates associated with it. Read every fine print of the documents before you sign.
Not building a great relationship with the local hard money lenders
In the world of real estate, what matters the most is the execution of the right decision-making strategy at the right time! It really needs someone who’s got their boots on the ground to tell you if the deal you’re getting with your hard money lender is the best one for you or not!
If you have a friendly hard money lender with whom you share a relationship of good friendship and not a business one, do you think he will be unwilling to share his knowledge with you?
In fact, I would say these people are the best ones who can guide you in getting your loan processed!
They are in the field and are acquainted with all the technical nitty-gritty of this business.
They know the past histories of other hard money lenders. They know who can be trusted upon and who cannot be.
They know who will suddenly turn their face away from you and give you a NO at the end only after you wasted so much of your precious time!
So always make good friends with at least one hard money lender and ask him to help you out with your choices!
You only need friendly advice from him – This must be well communicated to him so that his personal interests are shut down!
When he knows he’s not the one getting the deal, do you think he’ll hesitate to provide you an invaluable, honest opinion? Certainly not! So, you know what to do now!
Also, read about questions you need to ask a hard money lender
Not being qualified enough
Many commercial real estate investors who are successful today explain their experiences when they’d just begun and kept a toe in this industry.
These stories often include this mistake of not doing their part of the homework before approaching the hard money lender.
They have been cheated by these hard money lenders who charged impossible rates on loans, and these investors gave in to these hard money loan lenders simply because they didn’t have knowledge of what’s going on in the market and had no clue about the interest rates!
Now, why do these successful people share such stories?
It’s only because they’re trying to help out people who are new to this industry!
Mistakes needn’t be made by every single person to learn from them! The human mind is designed to learn from the mistakes of others.
So, do your part of the homework and get a fair idea of how much other private money lenders are charging before you approach your hard money lender!
Thinking that the lower the interest rate, the better it is for you; ALWAYS
This is one of the major mistakes to which most of the new real estate investors fall prey. It’s a very common notion that the lower the rate of interest on a loan, the better it is for you!
It needn’t necessarily be that way!
If a lender is charging an incredibly low rate of interest in the market while all other lenders are charging fairly, don’t you think there’s certainly something fishy?
There are very high chances that in such cases, the moneylender is going to include clauses that are not at all favourable to you!
Not only that, but it might also include impossible rates of pre-payment penalty or have serious consequences on delay in the payment of interest.
Remember that no one is in the business because they want to help someone by cutting down their own profits! It’s called a business for a reason, and everyone will have their set of personal interests!
So never fall into the trap of believing that just because a particular lender is offering you a loan at the lowest rate of interest, you’ve got to close the deal with him!
Think about why he’s charging so little, and maybe you’ll land up with more undiscovered or undisclosed intentions behind doing so! Don’t fall for this bait. Be the wise one and analyse every money lender thoroughly!
Also, don’t you think that it’s a very narrow-minded way of looking at the option of loan financing by only focusing on low rates of interest?
The loans are given to you at the times you will mostly need them!
And even if it gets delayed by a day or two, there can be harsh consequences, as your property would be bought by someone else who arranged for the cash much before you could!
So don’t make the interest rate the only mode of comparison! Look out for more meaningful reasons! Plain and simple!
Also, read about: How to Get a Hard Money Loan: Qualification Requirements & Step-by-Step Approval Guide
Not enquiring about the history of the money lenders
Most of the beginners tend to believe what is said by the money lenders. All money lenders would say that they’ve always given their customers a smooth flow.
You can never hear the real story by just relying on what those money lenders say about themselves!
You always need to ensure that the history of these money lenders isn’t going to hit you hard in the future.
Because the way one has dealt with his previous customers is most likely to remain the same with his future customers too! It’s not like they’re going to show their true faces to you in the very first meet!
Only when you start defaulting on repayments by chance will you see their true Colors! But then realising it late is of no good use to you, right?
So feel free to inquire about the lender with the neighbourhood people. Ask your private commercial lender to show you the testimonials he’s got from the previous clients!
Feel no shame in doing so! Because this is what is going to save you a lot of unwanted trouble in the future!
So these are the top 5 most commonly made mistakes by commercial real estate investors! Now that you are familiar with all of them, be the wise one to avoid all of these to have a fun-filled and fruitful investing experience!
