PRO TIP:
If you have a typical three-draw project, here is a tip for taking three weeks off of the timeline: use a general contractor that your hard money lender has worked with previously and trusts so the lender can rely on photographs of the site and verbal confirmations about your progress. Let’s say that it is Friday and you just finished completing all of the framing on your project. On Monday, your contractor plans on ordering the framing inspection. After that is complete, the contractor will need to purchase electrical and plumbing materials. Assuming that the hard money lender trusts the contractor, they might advance the draw at the conclusion of the framing and prior to the inspection.
NEGOTIATION TOOL #2 PAY A HIGHER RATE AND LOWER POINTS
In the hard money business, the lender is trying to “turn” their money as fast as possible in order to “churn points” and reduce deal risk. If a hard money lender is charging three points to originate a loan and twelve percent a year in inter- est, they really want the loan to pay off as fast as possible, so that they can increase their yield. If you can get in and out of your deal very quickly, ask your lender if you can pay a higher rate and lower origination points. That way, the lender gets a good yield if you end up having a longer maturity and the lender has the upside of churning the money if you pay it off quickly. EXECUTE FASTER Executing fast reduces risk and raises everyone’s yield. As described above, the hard money lender makes more money when they can churn their portfolio. You as a borrower/flip- per also make more when you can “churn” deals. If margins are constant, the more transactions that you do, the more money you make. How can you get things done faster? Be ready! NEGOTIATION TOOL #3 • Spend your time before the transaction closes lining up all of the detailed parts of the project. • Let all of your vendors know when they should be ready to start work on your project and what materials they will need for your job.
Working together with your lender to reduce risk and increase speed is essential to reducing costs. Showing your commitment to the deal by increasing your down payment; paying a higher rate and lower origination points to help the lender “churn money”; and executing faster by using a general contractor that your lender has previously worked with can all benefit both the lender and the borrower in the short-term (with one specific project), as well as the long-term (with having a beneficial working relationship). • If you can get your hard money lender to wire the next draw for the materials on Monday morning instead of waiting a week for the framing inspection to be completed, you have saved yourself a week of time on your project. Assuming that you have three draws and a 12-week project, you can save twenty five percent of the construction time just by expediting the draw process.
Charles Einsmann and Sam Jacknin each bring 20+ years of real estate experience, especially in distressed property sales and development, to Clear Sky Financial. Charlie also owns Green Dot Title, and Sam also owns and is principal broker for Green Dot Realty, and both are licensed realtors.
Learn more at www.cskyfinancial.com.
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