Start with exit, not story
Every hard money loan needs a clear exit: sale, refinance, or another defined takeout within the term. If the exit depends on perfect markets and perfect execution, it is not an exit — it is a hope.
Lenders underwrite the collateral path and the borrower’s ability to complete that path on time.
Equity and basis
Loan-to-cost and loan-to-ARV (or as-is value) protect the lender if the plan slips. Thin equity leaves no room for rehab overruns, slower sales, or appraisal haircuts.
- Purchase discount vs comps / ARV assumptions documented.
- Borrower cash into the deal is real, not circular.
- Holding costs and interest reserves sized to the timeline.
Rehab and execution risk
Scope, budget, contingency, contractor capacity, and permit risk decide whether the ARV story survives contact with the job site. Photo condition and a scoped budget beat vague “cosmetic” labels.
Borrowers who cannot explain the rehab line items usually cannot manage them.
Borrower readiness
Experience in the strategy, liquidity for overruns, credit context, and entity/title cleanliness all show up in lender review. A first-time flipper can still win on a conservative deal — but the structure should match the experience gap.
A practical lender checklist
Before issuing a term sheet, confirm:
- 01
Exit memo
Sale or refinance path, timeline, and what happens if the first exit slips.
- 02
Numbers you can recompute
ARV, as-is, rehab, LTC/LTV, and rental takeout metrics if refinance is the plan.
- 03
Risk flags
Heavy structural rehab, unstable comps, thin markets, or borrower liquidity gaps.
- 04
Monitoring plan
Draw schedule, inspection points, and reporting cadence.