Private Hard Money Lenders – Choose the One, Which Suits You Best!

Private Hard Money Lenders – Choose the One, Which Suits You Best!

I want to talk about the core difference between private and institutional lenders. An institution is basically a bank or a credit union, which provides funding for different stuff.

On the other hand, private is more about a bunch of people, who works under a private organization, which works towards helping people buying and selling good deals by providing financing. They are not held by government or any other regional organization but they work by themselves and use their own money.

Now, we come down to two basic types of lenders in the world of real estate:

1. Institutional lenders

These are the hard money lenders, who are a part of a bank or any other federal organization and they work with them. Although, it is quite difficult to get a loan from them because they look at lots of things including the borrower’s credit history, job, bank statements etc.

These are only stuffs that institutional hard money lenders are concerned about. They don’t have a real estate background, that’s why; they don’t care much about the worth of a property. Even, if you have a good deal, they won’t lend you unless your credit or job history is satisfactory.

There’s a huge gap between institutional lenders and real estate investors, which isn’t easy to fill.

2. Private hard money lenders

Private money lenders are usually real estate investors and therefore, they understand the needs and demands of a borrower. They aren’t regulated by any federal body and that’s why, they have their own lending criteria, which are based upon their own real estate understandings.

Their main concern is property and not the borrower’s credit history or bank statement. The motto of private hard money lenders is simple: If you have a good deal in hand, they will fund you, no matter what. But if you take a crap deal to them, then they won’t fund you, even if you have excellent credit history because they believe that if you’ll make money, then only they would be able to make profit.

If you have found a hard money lender but he or she hasn’t got any experience in real estate investment, then they won’t be able to understand your deal. They will always think like a banker.

A true private money lender is one, who can help you in evaluating the deal and giving you a proper direction and funding if you find a good deal. But if the deal is bad, they will tell you straight away. Before rehabbing a property, they know what would be its resale value, due to their extensive experience.

The basic difference between institutional hard money lenders and private hard money lenders is that the institutional lenders try to have everything in place and perfect order. They want to have all the figures and the amount of profit they would be making. They completely ignore the main asset, i.e. the property.

Whereas, private money lenders use their own fund and experience to realize what’s store for them. They don’t try to sell the paper or recapitalize. They just look at the property and see if it is worthy enough to rehab or not.

In the end, they just want to make good profits along with the borrower. If anyone goes to them with a good deal, they will fund them. Some of them only fund for the property, whereas, others gives funding for the repairs too as long as they can see a good ROI.


How to Find Genuine Hard Money Lenders?

Have you tried all self proclaimed hard money lenders in your town and you are unable to find much difference between the guidelines of these lenders and conventional lenders? Are you in search of a genuine hard money lender, who could fund you in as less than 7 days without much hassle?
If you have answered “yes” to above questions, then you have come to the right place. This article will help you in finding the answers to your questions in an easy way.
Before getting into the discussion zone, let us first deal with the 800 pound gorilla in the room…
So, what are the factors which make a “real” hard money lender company?
There are some basic differences between the so-called and real lenders, which you need to understand first. Apart from that, there are some solid reasons of choosing a true hard money lender over a false one.
Difference #1 – A true hard money lender isn’t interested in your credit history. A real lender will never put a condition that if you don’t have a good credit history, you won’t get financing. There are many hard money lending companies, which will say that they don’t care about your credit but at the end of the day, they’ll say that their minimum credit score requirement is 600.
The reason behind this is these lenders are packaging their loans for Wall Street or banks, so ultimately they’ll have to conform to all the legal requirements set up by these traditional lenders, which can’t be afforded by a person who has a bad credit history.
Difference #2 – On the other hand, a real lender ONLY cares about your collateral you are willing to invest in. They will get your property evaluated by professional independent evaluators, who will look at your property without any preconceive notions. They will give a purchase price, repair cost and estimated after repair value (ARV) of the property to the lender and if they find it good enough, they will fund you there and then.
Whereas, the imposters will put your credit score, job history, salary and other finances at the top of their loan requirements list before offering you a loan, which is exactly same as conventional lenders work.
This shows that there is a huge difference between a real lender and an imposter.

Getting Comfortable with Hard Money Investing

Many real estate investors overlook hard money loans as a strategy for acquiring property. That’s because these loans are typically used by desperate property owners looking for a way out of the real estate market, rather than into it. But hard money can work for anyone, and it can be particularly useful if you’re a new investor looking to build your portfolio quickly.

Hard money loans can generally be described as high interest loans available to borrowers with any credit rating, as long as they can can provide solid collateral – usually equity in real estate, such as a home. These loans are almost never issued by banks or deposit institutions, but rather by private lenders who specialize in short term lending at high interest.
Normally a home owner in need of a big loan would apply for a second mortgage, using real estate equity as collateral, but bad credit can make things difficult here. If a home owner has missed a few mortgage payments, the banks may refuse to provide more financing – hard money might be the only option in this case.
The limit for hard money loans typically hover at about 60 to 70 per cent of a property’s quick sale value, defined as the price a lender could reasonably expect to realize if the borrower defaulted on the loan, and the property was liquidated fast. The interest rate for a hard money loan is usually in the 15 to 25 per cent range.
Investors can take out hard money loans to buy a property, as long as they provide acceptable collateral – in this case it could even be the property they’re buying. The strategy here is to find a pre-foreclosure property, or any real estate with an owner prepared to sell below below market value as long as the sale is fast. If the investor can re-sell the property at full market value, before too much interest is paid on the hard money loan, he or she can make a significant profit. Hard money loans have helped many successful investors get started in real estate.


Building Your Real Estate Investing Team

To be successful as a real estate investor you will need a “team” of professionals that you can rely on. You do not need to build this team before you start investing. As you progress in your investing career you will meet many people in these fields that you will want to establish a working relationship with. Some team members will not work out and will have to be replaced. Don’t worry about this, as it is a normal part of the business. A great way to find your team members is through referral from other investors. Once you join a local real estate investors association you will meet active investors who will be able to guide you toward competent individuals in the business. One word of caution though – contractors have earned bad reputations. Therefore, most investors will not share their “best” contractor for fear that he will get to busy to do their work. Expect to have to sort through many contractors if you decide to do any rehab work. This team will be needed to successfully close your purchase and sale transactions. Not all members will be needed for every transaction but knowing they are in place will increase your confidence level.

Investor Associations

Most cities have a real estate investors association. You should visit the associations in your area and join one that you are comfortable with. Through these organizations you will find educational opportunities as well as networking opportunities. Attend as many of the educational programs as you can. This will help you to become more comfortable with each area of investing. The more areas you have knowledge in the better equipped you are to be able to meet the needs of sellers that contact you. Through networking at the association meetings you will be able to find many of your team members. You will also find other investors who will be interested in deals that you do not want. You can always pass these deals along for a bird dog fee or an assignment fee.

Wholesalers

You will find many wholesalers at association meetings. If you decide to rehab or rent property, a wholesaler will be a valuable source of property for you. They will spend the time and money to find the deal and negotiate with the seller. This allows you to spend your time managing your rehab or rental property. Make sure you verify their ARV (After Repair Value) on the property as well as their repair estimate. As long as the numbers work, you should not mind paying them their “wholesale fee”.

Real Estate Agents

Most real estate agents are not interested in working with investors. This is because they are trained to make “full price offers” on listed property. In every area there are a few agents that do work with investors. These are usually the most successful agents in the area. They understand that a good investor client means easy repeat business for them. You will find these agents by looking at who has the most listings in your target area as well as word of mouth at investor association meetings. These agents are very busy so it may be difficult to establish a relationship with them. However, it is well worth the effort in the long run. They are especially needed if you decide to be a wholesaler. They will have access to most of the bank owned properties.

Real Estate Lawyers

You will need a strong real estate attorney on your team as soon as possible. This person will handle closings for you as well as title searches. They can also give you legal advice as you run across unfamiliar situations (such as a seller in bankruptcy). You should make sure that your attorney specializes in real estate.

Lenders

There are three main type of lenders that you will be dealing with:

Hard Money Lenders – Based on ARV of property, your credit history and close quickly

Conventional Lenders – Based on your credit, current property value, slow closing

Private Money Lenders – Based on your relationship with the individual

You will find all three types at most association meetings. When you are beginning your investment career you will most likely be working with a hard money lender. They are called hard money lenders because they charge pretty hefty fees to make the loan. They will usually loan up to 70% of ARV for a period of 6-12 months. They typically charge 3-6 points up front to make the loan (each point is 1% of the loan amount), interest rates of 12-18% and will hold repair money in escrow to be paid out as repairs are completed. Although these fees sound expensive they really aren’t. It is much cheaper to borrow from a hard money lender than it is to take on a money partner and give up 50% of any profit made. See the following simple example for a comparison using a 6-month holding period, 3 points upfront and 12% interest and a final sales price of 5,000:

Loan From Hard Money Lender

Sale Amount 145,000

Loan Amount 100,000

Points to Lender 3,000

Payments to Lender 6,000

Partner Split 0

Net Profit 36,000

50% Money Partner

Sale Amount 145,000

 Loan Amount 100,000

Points to Lender 0

Payments to Lender 0

Partner Split 22,500

Net Profit 22,500

As you can see, hard money lenders are not as expensive as you thought!

You will probably only use a conventional lender when buying long term rental property. Conventional lenders will be necessary when you sell property to homebuyers. A good mortgage broker will be able to find financing for buyers with a variety of credit issues. An average broker will only be able to finance buyers with perfect credit. Make sure you look for brokers who can find financing for people with “A”, “B” and “C” credit. Once you have established a track record as a successful investor you will be able to attract private investors. These are people who have money that they will loan to you in order to get a better return than a bank or the stock market will give them. You can replace hard money lenders with private lenders and stop paying the upfront fees. You may also be able to negotiate a lower interest rate than the hard money lenders charge.

Insurance Agents

There will be two main types of property insurance that you will need. These are “Builders Risk” and “landlord” insurance. When you are dealing with a vacant house that is under repair you will need “Builders Risk” insurance. Builders risk insurance will cover the property and usually the materials being used during the rehab (in case of theft). It is more expensive than a landlord’s policy because of the increased risk. A landlord policy will cover the property only, not the contents. Your renter will need to have a renter’s policy to cover their belongings. Landlord policies usually will not cover vacant property or property under repair. Most agents do not sell both types of policies. Make sure to acquire the correct type of policy so that you are always covered.


What Do Hard Money Lenders Look For?

Believe it or not, hard money lenders want the same thing you want – a shot at a great investment. Remember: investing involves putting up your time and/or money with the intention of realizing a profitable return. When you keep this concept in mind, it’s astounding just how broad the investing arena actually is. High rise buildings, apartment complexes, condominiums and luxury office space can become a reality – not just a dream!
If, for example, your credit rating is bruised and you’re pressed for time, securing a hard money loan for a shot at a great commercial property – that’s investing.
On the flip side, if an altruistic, financially secure professional discovers that they can make a nice return helping people just like you find the financing they need in order to build their real estate empire- even if all other avenues have failed – that’s investing too!
Of course, as a hard money lender works to decide if yours is a worthwhile opportunity, there are other things they’ll want to know.
What Your Hard Money Lender Will Want to Know…
There are several questions any hard money lender worth a grain of salt will want to know:
o While your credit rating isn’t as important to a hard money lender, they do want to feel confident that you can actually pay them back. This means you should try to gather your W-2s for the past few years, bank statements for at least the last six months, as well as what you’re offering as collateral in the event that you might possibly default on the terms.
o Hard money lenders – across the board – will take diligent measures to accurately assess the value of the property you’re trying to buy. In addition to third-party appraisals, most hard money lenders will require that a personal on-site evaluation is made. Because hard money lenders DON’T want to be stuck managing a delinquent property, they need to determine if your potential property can be profitably liquidated QUICKLY! This is the primary reason that hard money loan to value ratios are often stricter than those in traditional financing situations.
o Hard money lenders will require that you actively participate in the “due diligence” portions of your loan. This means that you’ll need to do your homework to insure that there are no other liens or suits associated with the property. If any are uncovered, they’ll have to be addressed in order for the transaction to progress any further.
o Finally, hard money lenders want to have confidence in your commitment and professionalism. You can help boost their confidence in you by returning phone calls promptly, responding to inquiries in a timely manner, and by actually doing the things you’ve agreed to do.
When it really comes down to it, a typical hard money lender is a lot like the rest of the world at large. They want a good deal. They’re enticed by the opportunity to make a nice profit. They want to handle deals that are secure. They want to team up with borrowers they feel confident about. They have empires that they want to build as well – and together, both of you can win.
If you can find a way to show them that your investment proposition is one that can satisfy all of their criteria, you’re well on your way to establishing a VERY strategic alliance.
If you can set their investment fears to rest, then they can do the same for yours!
A good, solid investment always involves the proverbial “two way street.” As soon as you embrace this fact, you’ll be surprised at how often you’ll hear opportunity come knocking!


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