While here at CEB Capital we do handle 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. While getting your entire purchase price paid for is a dream, there are costs upfront (i.e. appraisal) that need to come out of pocket. Stating that you don’t want to put any money towards the deal makes lenders leary that once it’s all said and done you won’t have the funds to get the deal closed. Meaning time wasted for both yourself and us. Also, how will the monthly interest payments be made? We need to know we will get repaid once the ink dries.
- Inexperience. While we love working with new investors, requesting 100% funding gives the impression that not much research has been done in the real estate investing field. Investors should always expect to have skin in the game when it comes to investments and should know that most of the time a certain percentage of the deal won’t be covered by financing.
- 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, if there is a drop in the market and the borrower has no equity in their project, there is a greater chance the job will be abandoned and so will the loan. 100% financing is the cause of the housing market crash of 2007 for this very reason.
- Success for borrower. Studies prove that 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.