Many builders and developers—particularly those who weathered the 2008 credit meltdown—have, at least to some degree, blemishes on their credit reports. For those of us who have been in the real estate game for quite some time, this is hardly a surprise. But can a real estate entrepreneur with truly “bad” credit get hard money financing for a fix and flip project? The answer is unequivocally . . . maybe.
Private and hard money lenders first analyze the property itself. What is the neighborhood like? How quickly do properties sell there? Is this a below-market purchase price? How complicated is the planned renovation?
Next, hard money lenders will look at the borrower. A private lender like Walnut Street Finance may keep an eye out for the following three indicators:
- Experience. Has the borrower done this type of project before? How many times? Does he or she have an organized and concise budget and draw schedule? Is the project timeline realistic? Often, responsiveness and completeness of information are “tells” that reveal a successful track record for any given builder/developer.
- Cash. We’ve all heard the phrase “cash is king,” and in this industry, truer words have never been spoken. Sufficient and ample cash can provide the staying power to withstand any storm that a project can throw at you. And, yes, if you have cash, it will be significantly easier to borrow more capital.
- Financial condition. This typically includes net worth, income, expenses, and credit rating. All of these items are reviewed collectively, and a strength in one area could outweigh the weakness in another. For example, someone with a good salary and credit score can make up for a lack of cash.
Bottom line: As a rule of thumb for the above indicators, a borrower will need to check two of the three proverbial boxes to really be considered a “good” borrower. No experience but steady income and plenty of cash? It’s a go. Poor credit but significant experience and sufficient cash? Green light.
Those starting in the industry, who may find themselves without experience and short on cash, shouldn’t get discouraged. We all have to start somewhere. Deals are still doable. Team with a partner who can act as a guarantor and/or financier for the equity portion of your first few deals – this is a great way to gain experience and build up capital before you strike out on your own.
Don’t be deterred, as success comes to those who are creative and persistent. If you need a hard money lender for your next project or are just looking for a bit of real estate investment advice, Walnut Street Finance today is your one-stop shop.
Remember when we said cash is king? Perhaps the only exception to the two-out-of-three rule would be a borrower, with bad credit and no experience, bringing substantial cash into the deal.