While here at CEB Capital we do handle fix and flip projects that end up being 100% financed, there is a certain measure of trepidation that comes when potential clients request 100% financing out of the gate. Here are the four reasons why needing a fully funded project makes hard or private money lenders nervous:
- Inability to close. We know that starting a successful business with $0 invested is the goal. But, there are costs upfront (i.e. appraisal) that need to come out of pocket. If we hear the words, “no money invested” we automatically think, “no money to close.” Meaning time wasted for both yourself and us. Also, how are they paying the monthly interest payments? We need to know we will get repaid.
- Inexperience. Experienced investors know that 100% financing is a very unlikely scenario. Investors should always expect to have skin in the game when it comes to investments. They should also know that 100% financing is not always an option.
- No risk involved. When you’re asking a lender to provide 100% financing, you’re also asking that lender to take 100% of the risk. This makes us believe that you’re not as serious about the project as you need to be. Investors with their own funds invested are more cautious and attentive to the deals than those who don’t. Also, what if the market drops and the buyer has nothing tying them to the investment? 100% financing is the cause of the housing market crash of 2007 for this very reason.
- Success for borrower. Studies prove that fix and flip borrowers who have invested their own money along with private or hard money financing are the most successful in real estate investing. We want our clients to come out ahead to ensure a very long and fruitful relationship for both of us.