Top 9 ‘Musts’ for a Hard Money Business
1. Decide what it is you do.
There are many business models within hard money lending: investor rehab, primary residence, commercial bridge loan, etc. And they are all good models, when done correctly. The important part is that you know what you do and stick to your game plan. When a borrower, investor or broker hears you say you do every kind of loan under the sun they are going to think that a) you aren’t really doing any business or b) you are going off the deep end in the near future.
2. Become a master of that niche.
When do you do decide the right lending model for you, learn it inside and out. And then back to front…and whatever other colloquialism there is for becoming an expert. Your business depends on it. How well do you know your local market? How about lending and foreclosure laws? What do your competitors charge? How much personal financial documentation should you collect? These are the kinds of things you need to know like the back of your hand. Of course, many things just come with the years of experience. For example, there is an extremely high correlation between low credit scores and problems with managing a construction job. That’s the sort of thing you need to be aware of and know how to handle.
3. Grandmother’s money.
When we were raising capital we would tell prospective investors that we would fund every one of our loans ourselves if we had enough cash. We would even fund them with our grandmother’s retirement money (by the way, we and plenty of relatives have retirements funds invested in our loans). That’s how confident we are in our underwriting. Can we pick stocks or underwrite a 50mm development loan? No chance. But we are as good as they come in our niche.
4. Proper planning.
Any business book will tell you that committing a business plan to paper greatly improves your chances of reaching your goals. So what are they? What are your targets for loan volume, units and revenue for this year? How about three years down the road? Then work backwards by year, quarter, etc to determine how many leads and closings you need this month to hit the long-term goals. It’s a daunting exercise because seeing the 3 year numbers can be a little scary (how are we ever going to hit that?!) but it’s very worthwhile. As you progress and see yourself hitting targets and raising goals, you’ll know you’re on the right path. And if you aren’t, well, that’s important to recognize too.
5. You may not know it, but you’re in the marketing business.
Yes, we are in the business of lending money. And lawyers are in the business of representing clients in legal matters. Dentists fix teeth. But we are all in the business of attracting clients and generating revenue. Along with prudent underwriting, I would say marketing is priority #1. And I know a lot of people didn’t think they were getting in that business. We didn’t either. Are you proficient in online marketing? SEO, social media and email marketing? How well do you know your web traffic, inbound phone calls and conversion rates? How much money do you spend in each marketing channel per closed loan? You’re going to want to be on top of this. Your competition is.
6. Your systems are incredibly important.
This is another one that surprises new hard money lenders. You probably didn’t know this was a vital part of your business as well. Every month we take in 1000 leads, close 15 deals and manage 100 or so outstanding loans in the portfolio. Do you think we need some well-designed systems and personnel to handle all of that? You bet we do! Or you could end up working a full-time schedule to close 1 deal a month. We know people who do that. There’s nothing wrong with it if that’s your goal. But if you’re trying to do real volume and build a 7 figure business you are going to need proper marketing, email, CRM, sales, origination and loan servicing systems.
7. Good cop, bad cop.
When it comes to managing our borrowers and the loan portfolio, we use the good cop, bad cop approach. During the origination phase, our loan officers (I don’t like that term; it’s too old school. But we’re still using it until we decide on a better one) work with the potential borrowers to negotiate and decide on a loan structure that works for both sides. They’re the good cop, the borrower’s advocate and best friend. Their #1 job is to turn that borrower is into a life-long client. In this phase, the underwriter is the bad cop. He/she is assessing risk and structuring the loan in a safe manner. It’s an incredibly important job and the lynchpin of this whole business model. Because of that he/she can be viewed as the bad cop. And that’s ok. That’s the business we chose. When the loan has closed and is in the portfolio, the portfolio manager becomes the bad cop monitoring construction, ensuring timely loan payments and, if need be, managing the default process. The most important rule in this area of the business is that you set your portfolio guidelines and stick to them, to avoid playing favorites and making everything a judgment call (see the importance of systems above). Payments have a grace period until the 5th of the month and then a late fee is assessed. A payment 30 days late triggers loan default. You get the idea. The important part is that you decide on your rules and stick to them.
8. Don’t think like a banker.
Some of us start a hard money lending company after coming from a job at a bank, mortgage company or commercial lender. But please don’t make the mistake of thinking like a banker. Private lenders use common sense, think on their feet and know how to capitalize on a good opportunity. Bankers do the opposite. They move slowly, ask for unnecessary documentation and turn down even the most sensible deal if it doesn’t meet one of their guidelines. Now I don’t fault bankers for doing business in that way. They operate how they have to in order to appease their bosses and regulators. But that’s for them, not for us. Don’t be afraid to look outside the box and get creative to make a deal work.
9. Treat your business like a real business.
You might notice that I entitled this “Top 9 ‘Musts’ for a Hard Money Business” and not “Top 9 ‘Musts’ for a Hard Money Lender”. This material is meant for those entrepreneurs who want to make the hard money lending model (which is a great one) into a real, live business. Not a “mom and pop” operation doing one loan a month. And again, there is nothing wrong with that model. Especially when you’re lending your own money, that approach can be an incredible “bang for your buck”. But this article speaks to those who want to take this model to the next level with high loan volume, plenty of investor capital, an office, employees, etc. If that’s your goal, please take these 7 “Musts” seriously. If any of my points assist you in any way, my job is done.
Good luck! Feel free to contact us for help.