Why We Don’t Negotiate on Loan Terms as a Hard Money Lender

Here’s a quick tip that I learned in my lending business. I learned the hard way that you should never negotiate on your loan terms. By sticking to our guns, it has helped us systematize the way that we do things. It has also increased profit in general, which is a win-win all around.

This comes from an experience that I had with a borrower that has made a pretty big impact on my business model. About six months ago, I had a loan application come through. The borrower was in a pinch and didn’t have the funds necessary for an upcoming project. He was a good borrower, good credit, good experience, all green flags. The only drawback was he thought our fees were a little bit too steep.

For those that don’t know, we charge 3 points (3%) and 14% interest. Up until this point, we would very rarely negotiate on our points and our terms anyway. Mainly because that’s how we make money. In our business, the interest goes to investors and the points go to us. That’s how we “keep the lights on” and keep things running.

During this time, we had a good amount of capital sitting in the account that we were trying to lend out. I was really tempted to say yes.

He was asking if we could charge 2 points instead of 3. I really wanted to do it. I almost said yes. Then, at the last minute, I decided to stick to our model and told him “We don’t really negotiate on our points and our terms. I’m really sorry about that, but we completely understand if it’s too expensive for you and if this won’t work for you. Let me know if something changes.” He said it was okay but I could tell he was a little disappointed.

We ended up proceeding and doing the loan anyway (at the 3 points). He mentioned multiple times that it “was going to be a super quick, 30-day project”. It was going to consist of new paint and carpet, that’s it. Then, they would throw it back up on the market as-is.

Well, it has been about five months since this interaction and it has not been a “quick paint and carpet” kind of a deal. I’m not saying this because I don’t think he’ll perform. I’m saying this because I think it will go full-term and possibly extend a little bit past what would have been our six-month term length.

Taking a step back, if I had accepted the two points in the beginning, it wouldn’t have been worth it. I could’ve taken the funds I would have lent out and churned them faster somewhere else. I could have re-lent them out and made more points on the front end of other loans. They probably would have also paid off quicker than this loan too.

This wasn’t life changing by any stretch of the imagination, but it was a lesson to myself. Plain and simple, we don’t negotiate on terms, we don’t negotiate on points. This is what we do and if you don’t like it, that’s okay!

We don’t negotiate on terms, we don’t negotiate on points. This is what we do and if you don’t like it, that’s okay!

I realize we’re rather expensive, but if that doesn’t work for you and it doesn’t fit into your model, that’s okay. If it’s not right for you, it’s not right for us.

Through this experience, I learned that not only does refusing to negotiate save you time and money, it also helps systematize your business a little bit better.

Let’s say you currently have funds lent out to three people: borrowers A, B, and C, and they’re all on different terms. In this example, let’s charge one point for borrower A, two points for borrower B, and maybe three points for borrower C. Maybe one of the borrowers is at a 7% interest rate while another borrower is at 12%. Nobody has the same interest rate across the board. It’s really difficult to track what each borrower is being charged if they are not all the same (but if you do want to do this anyway, this is where Lendr comes in handy). That is why I choose to never negotiate on the terms — mostly for my own peace of mind.

I think you get the point.

I don’t keep track of that, and I don’t want to keep track of that. The software that we use could keep track of it, but it’s easier to make it even across the board. I know that every single loan we have is 3 points and 14%. Easy. It’s set in stone and that’s how it is.

The loan that I was talking about earlier was a pretty sizable loan (our average is typically around $150,000), somewhere in the $300,000 range. 2 points on that loan would be $6,000 compared to 3 points would be $9,000. That difference is fairly substantial.

All that to say, stick to your guns. Stick to the way that you do business just because it’ll make your life easier and it’ll also make you more money.

Let me know if this has helped you and how you set up your borrowers.