Keep Open Door Policy with Your Hard Money Lender
When a real estate rehab project is starting to go sideways, never shut the door on your hard money lender. Maintaining strong, open communication with your hard money lender on a real estate project is your best chance of success. Particularly on a rehab project when unforeseen obstacles appear such as budget overruns or cash flow problems, don’t act like a frightened turtle and go hide in your shell. If you have a hard money lender on the project, give your lender a call and tell him or her what’s going on if trouble arises. A hard money lender may have experienced similar obstacles before and may have some creative solutions to overcome them.
An example is a real estate rehab that we provided a hard money loan on fairly recently. We did a final walk through prior to closing on the loan and the house had some crazy paint colors (e.g. pink, green, and orange), but it didn’t seem to need more than just some cosmetic remodeling. When the third loan payment was late and the property was still not listed for sale, we called the borrower to find out what was going on. He informed us that his partner had split town along with the funds to complete the rehab. Long story made short, the borrower simply did not have anymore money to finish this rehab project. All of the demolition had been completed, the trash had been hauled away, and the house was a clean slate on the interior ready for carpet, paint, cabinets, and fixtures.
With no money to complete the project, this borrower was up a fast moving river without a paddle. He said he was afraid to tell us that he was in trouble and was trying to come up with the money and solve the problem himself without getting us involved. But failing to communicate with your hard money lender in a bad situation like this is a big mistake. Once we knew the situation this borrower was in, we were able to provide some of our own resources, including contacts in our network, to help solve the problem. A real estate investor in our network reached out to the borrower because he saw the merits in the rehab project and decided to partner with him. Because this borrower told us that his deal had gone sideways, we were able to step in and lend our contacts which ended up saving the deal.
Never leave your hard money lender out of the loop of communication on a deal if things go sour. Your lender is similar to a partner on a real estate deal and needs to be communicated with if unforeseen obstacles come up. If everything is going smoothly on a rehab project, on schedule and on budget, then no news is good news. But sometimes serious problems begin to appear such as: running out of money on a rehab project, repairs go way out of scope, an environmental issue arises, a State, City, or County conflict rears its ugly head, etc. When serious problems arise in a real estate deal, a lot is at stake. Give your hard money lender a chance to provide advice, resources, contacts, or even additional capital if necessary, rather than lose the deal altogether.