Category Archives: Hard Money Loans

Borrowing Money for Your Real Estate Investment.

Did you know that you could borrow the funds to purchase and renovate your real estate investment property without going through a traditional bank? You can use other people’s money to leverage your real estate transactions and borrow based on the value of the property after it’s repaired!

There are several ways to borrow money other than going to a traditional mortgage lender—you can borrow from a hard money lender, a private investor or buy the property for your retirement planning through a self-directed IRA.

For now, let’s look at the hard money option. A hard money loan is a short-term, asset-based loan that is structured for real estate investing. Hard money lenders (and there are several reputable, local lenders in this city) will loan a real estate investor up to 75% of the value of the property after repairs, and you can use that loan to acquire the property and renovate it. The better the deal you can find, the less out of pocket expense you’ll incur.

Hard money loans usually have 6-12 month terms and the rates vary from 12-17% interest only. This may sound like a lot of interest, but if you renovate the property quickly, you can re-finance out of the loan into permanent financing quickly, or keep the house until you flip it to an end buyer for a profit. You’re only paying this high interest rate for a short time, and if you know your exit plan upfront, this is an excellent way to borrow money without having to use your own cash to get into the game.

Most good hard money lenders will help you get that permanent financing in place before you even buy the house, so you have a smooth exit strategy before you start. And because these are asset-based loans, your personal credit and cash reserve requirements are not nearly as strict as those required by a “big bank.” Plus, the hard money lenders don’t care about how much repair the property needs—as long as you buy it right they will loan you what it takes to buy and fix the house.

Also, a good hard money lender will appraise the property for you and guide you on the best way to rehab the house given that particular market and neighborhood. This is a great way for individuals to buy distressed properties and borrow the money to renovate it with little cash out of pocket.

All you have to do is find the right property, and the agents here at Big State Home Buyers can help you find the best possible deal, at any price point, and refer you to some of the best lenders in town. We have relationships with trustworthy and reliable lenders all around town.

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.