1) Don't overestimate ARV — conservative comps only. 2) Never borrow without a credible exit. 3) Budget a rehab contingency (10–20%) and carrying reserves. The rest are below. See Requirements and How to Qualify.
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Deal-analysis mistakes
1. Overestimating the ARV
An optimistic after-repair value inflates both your loan and your expected profit — and collapses at appraisal. Use conservative, real comps. Test it →
2. Skipping the 70% rule
Paying too much relative to ARV leaves no margin. If the deal fails (ARV×70%) − rehab, rethink it.
3. Underbudgeting the rehab
Renovations run over. Without a 10–20% contingency, a small surprise breaks the budget.
4. Underestimating the timeline
Permits, materials, and labor slip. A term that's too short forces costly extensions.
Money & structure mistakes
5. No exit strategy
The cardinal sin. The balloon will come due — line up a sale or DSCR refinance before you borrow.
6. Ignoring the balloon
Interest-only feels cheap monthly, but the full principal is due at maturity. Plan for it from day one.
7. Draining reserves to close
Lenders want 6–12 months liquid. Using it all on the down payment leaves nothing for overruns. Reserves also lower your rate →
8. Taking the first term sheet
The same deal can price 2–4 points apart by lender. Not shopping wastes real money.
Execution mistakes
9. Misreading the draw schedule
Rehab funds release after inspected work — not upfront. Plan cash flow for the gap between spend and draw.
10. Using hard money for a long-term hold
The premium bleeds you monthly. For a rental, refinance into a DSCR loan once stabilized.
11. Ignoring extension terms & fees
Ask upfront what happens if the project runs long — extension cost and process — before you sign.
The Don't / Do checklist
| Don't | Do |
|---|---|
| Estimate ARV optimistically | Use conservative, real comps |
| Skip the 70% rule | Keep purchase under (ARV×70%) − rehab |
| Budget rehab to the dollar | Add a 10–20% contingency |
| Assume a fast timeline | Pad the term for slips |
| Borrow without an exit | Line up sale or DSCR refi first |
| Forget the balloon | Plan principal repayment from day one |
| Drain reserves to close | Keep 6–12 months liquid |
| Take the first term sheet | Shop 3+ lenders |
| Expect rehab funds upfront | Plan cash flow around draws |
| Hold long-term on hard money | Refinance into DSCR when stabilized |
| Ignore extension terms | Confirm extension cost before signing |
Hard money mistake FAQs
Most common mistake?
Overestimating ARV — it inflates your expected loan and profit and collapses at appraisal. Use conservative comps.
Why is no exit so dangerous?
The balloon comes due. No sale or refinance plan means extension fees or foreclosure.
Do investors underbudget rehab?
Often — always add a 10–20% contingency and carrying reserves.
Is taking the first term sheet a mistake?
Yes — the same deal can price 2–4 points apart by lender. Shop it.
Reviewed by the licensing team at Save Financial, a California-licensed mortgage brokerage (NMLS #377740, DRE #01875766) founded in 2009 and serving all 58 counties from offices in Newport Beach and Marina del Rey.