I saw a post the other day from an investor who was told he had to get the contract (deal) before he could get funding. Another poster disagreed, and told him that wasn’t true. In the interests of not hijacking the thread, I thought I would post some information that might be useful.

It is very desirable to line up funding for your deal before you sign and contract and put up your earnest money. If you are using conventional residential funding for that deal, it is easy, since pre-approvals are the norm in the conventional residential financing world. If you have a private source of funds – an equity partner or a private lender you have worked with – it might also be easy because of the one-on-one relationship you have developed.

If you are being told you have to get the deal before you can get the funding, you are probably hearing that from hard money lenders. With a few specific exceptions, I don’t know any hard money lenders who will look at and actually approve a deal until there is a likelihood of it actually becoming a deal. And here is why:

I get sometimes a dozen calls in a day from people who want me to approve the deal before they’ve made the offer. Remember, this is a hard money loan based on the property, the amount of cash in the deal (skin in the game) and the experience level and exit strategy of the borrower. In order to tell if I’m likely to approve a deal, I have to know all about the cash available, the rehab plan, and then I have to pull comp sales to figure out the ARV. I have to decide which sales are true comps and which skew the results. I then look at the available houses on the market that are going to be competition based on the projected selling price and location, and time of year. And all before the buyer has even made an offer! In the best of circumstances, this takes about 1/2 hour if I have no interruptions, sometimes up to an hour depending on the deal. If I did nothing else all day, there goes 6 hours of my day. And of these inquiries, maybe one in 30 or 40 actually becomes an accepted contract.

I can spend my entire day looking at deals that never happen, or I can spend my day approving funding for deals under contract where the buyer needs to close quickly. If you are a buyer who needs to close quickly because the clock is ticking on your deal, which would you rather?

An exception that was referenced above would be a repeat borrower that I have done business with already. In that case, I of course will look at a deal while they are in negotiations.

We all have to make decisions on how to prioritize our time, but the above illustration is to explain why you may be told that you need to get the deal before you can get the funding. If you can get true project approval before you sign on the dotted line, all the better, but if you can’t, this may be why.