Author Archives: Shawn Molem

Hard Money Myth

Hard money is too expensive.
Fact: Hard money is likely going to cost more than that advertised by traditional lenders, i.e. banks. Private money is priced according to the law of supply and demand, just like that from more-traditional institutional lenders. Bank financing may not be an option. A quick funding date may be impossible for a bank to meet. A rental property may have just recently been leased and is not adequately seasoned. The borrower may be self-employed and have difficulty documenting his income. A borrower needs to explore all avenues and select the option that best fits his requirement. The cost of money is only one factor.
If a borrower is working with a bank who won’t allow secondary financing and doesn’t have the equity the bank requires without secondary financing, his choices are to stick with the bank and bring in an equity partner or replace the bank with a hard money lender who will allow secondary financing. Hard money will undoubtedly be much less expensive than bringing in an equity partner.
Additionally, hard money is not too expensive if a borrower can use the funds to quickly take advantage of a deeply-discounted purchase price or to accommodate a partner who wants out of the business relationship.
The key for any borrower/investor is to focus on the global picture. The cost of borrowed capital is only one of many factors to consider.

Hard money lenders make risky loans.

Fact: While the collective wisdom, even among real estate and mortgage professionals, is that hard money lenders make risky loans, our experience is that the opposite is true. Because hard money lenders are often lending their own money (as opposed to a bank employee lending someone else’s money), they are particularly risk averse. Unless a hard money lender really understands how to value the collateral securing the loan and understands the prevailing market, he will likely not make the loan, regardless of the strength of the borrower or the LTV. On the other hand, with understanding comes knowledge, and a hard money lender may make a loan that others consider risky because he simply has better information.

Advantages Of Hard Money

Speed

Hard money loans are fast. Because they don’t need as much due diligence on non-property-related issues, they can be approved and funded quickly – often within a week. An experienced lender will know what a property is worth, and can make a quick decision based on the estimated after-repair value of the property by itself.

Flexibility

Hard money lenders don’t need to conform to anyone else’s underwriting standards. Fannie, Freddie and the VA aren’t involved. The hard money lender is primarily interested in the safety of his capital. Demonstrate to the lender that his capital is more than secured by the collateral, and you’ll get the loan.

The hard money lender isn’t very interested in your tax returns, your income or anything else. If he knows the loan is secured by adequate collateral, all that other nonsense is irrelevant.

Less Red Tape

The hard money lender lends on the asset – not on your income and credit history. Because of that, the documentation is much less involved than your typical bank mortgage. If you’re a serious flipper, your time is money. Hours spent applying for bank loans are better spent finding good properties, overseeing process has value in and of itself.

Document Preparation Tips for Hard Money Loans

To streamline the preparation and reduce delays, phone calls and other follow-up steps, up-front preparation is essential. The information required to prepare loan documents will need to be adjusted based on the loan type (purchase, refinance, development, construction, etc.). However, I recommend that a checklist of items, similar to the following, be used to ensure that the necessary information is gathered:

• Borrower’s name (whether individual, corporate or other) including vesting, title of signor, address, phone, fax, income, asset liabilities, schedule of assets, completed 1003 or similar application
• Borrower’s personal guarantee—yes or no
• Borrower’s down payment or cash-in (if applicable)
• Seller’s carry amount (if applicable)
• Address, APN and legal description of the subject property
• Other collateral: cross collateralized property address, APN and legal description
• · Payment frequency: monthly, quarterly, etc.
• · Due date of payments
• · Approximate payment due date
• · Amount of payments
• · Broker’s name, license number, address, phone
• · Trustee’s name and address (if applicable)
• · Schedule of use of funds

What is Hard Money? Who needs it.

Hard money lenders are typically private individuals or small groups that lend money (Hard money) based on the property you are buying, and not on your credit score. Usually these loans cost  more than an average mortgage, often times up to twice what a regular mortgage does, plus origination fees.

Who Needs Hard Money

Developers and house flippers, amongst others, will use it to fund deals because you can often borrow up to 100% of your purchase price! On the other hand, hard money lenders will frequently require you to back up your loan with real assets. If you know you can buy a property and turn it quickly at huge profit, and you can’t get a standard mortgage, it might be one way to go. Some investors use hard money to get into the property, do some quick fixes to raise the property value, then get a new loan (based on the property’s new, improved value) from a bank to pay off the hard money lender.

5 Ways To Find Hard Money In Your Area.

Ask a Real Estate Agent

Real estate agents are probably the best source for tracking down hard money lenders. While not every agent will personally have contacts with hard money lenders, the agents that move a lot of bank REO’s probably do. Keep asking agents until you find one that can get you connected with a hard money lender.

Ask a House Flipper

A great source of finding good hard money lenders is simply other investors doing the same thing. You can find other flippers by tracking down who is buying many of the “fixers” in your area via a real estate agent or country records.

Newspaper

Some newspapers include a section titled, “Money to lend.” Often times a hard money lender will use this area to advertise for their business. Remember – a hard money lender needs you as much as you need them.

Craigslist

Over the past several years, many hard money lenders were forced to take back a number of properties in foreclosure. I personally know several hard money lenders who are using Craigslist to sell these foreclosed properties. Look for “For Sale By Owners,” and “handyman specials.” You may need to sift through a large number of duds but don’t get discouraged – it only takes one to fund a deal.

Mortgage Brokers

Mortgage brokers are individuals who get paid to find you a loan. They don’t simply work for one institution but rather have the ability to search multiple sources to find the best fit for you. Most mortgage brokers do not have contacts with hard money, but some do. Note: this may be a more expensive route to take, as often times the mortgage broker’s fees will be added to your costs.