Real Estate Investing Facts

The Scoop on Hard Money Lenders

by Alexis McGee –

With the credit markets still way too tight, the majority of my clients come to me asking how they can buy a bank owned foreclosure, without using any of their own cash or credit. Obviously, since the REO bank is already in the lending business, it would be great if they would just “carry back” a new loan for you. And sometimes, REO lenders will offer that option to credit worthy buyers. But are you willing to pay a higher price for the property to get their financing?

What if the REO lender is willing to accept a substantially discounted “all cash offer” making it obvious that you have to find the cash to get that great deal? Now it’s time to look for a money partner or hard moneylender to fund your deal.

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Many of my new investor clients are curious about hard money lenders. Who are they? What is hard money? How do I get some? Is it beneficial? Let me share with you some of the basic principals about hard moneylenders.

First we must determine what the term “hard money” really means. When money is discussed between investors, it is considered to either be “soft” or “hard.” Typically soft money is easier to qualify for and the terms are flexible. Hard money, on the other hand, is just the opposite. It is much more restrictive. Not because it’s more difficult to obtain, but the terms are very specific and much more strict.

Hard money comes from private individuals with a great deal of money on hand. This is why hard money is also referred to as “private money.” The money used for investment purposes comes from people, just like you and me, not a lending institution. So their first priority is to protect their investment capital. This is why the terms have to be so strict. If it were your money, you would want the same.

So what are some of the terms of “hard money lenders”? Obviously it varies from lender to lender. It used to be that hard money lenders would lend solely based upon the deal or property at hand. They would only lend up to a certain percentage of the fair market value of the property, that way in the event of default, the hard moneylender would profit handsomely if they had to foreclose or sell to an end buyer.

You will find that some hard moneylenders require more than just equity to qualify. This is because the laws now are favorable for consumers. Consumer protection laws, combined with time consuming and expensive court procedures, have forced some hard money lenders to become even harsher when applying for a loan.

Yet, some like the old fashion way where they only care about the deal so they do a drive by or physically look at the property. Again, it all depends on the person with whom you are dealing.

It is good to know what the terms are when dealing with a hard money lender so you can find the one that will fit your needs. Here are some of the terms you can expect to see.

Typically they will only loan you up to 65% ARV (after repaired value). This means that a hard money lender can loan you up to 65% of what the home is worth in repaired condition. So if you find a home worth $45,000 in the condition it’s in, and needs $20,000 in repair work, after it is repaired the current fair market value is worth $100,000. That means that typically they can lend you up to $65,000, which would cover the cost of the house and the repairs.

Other terms you can expect are high interest rates. Interest rates vary from 12% – 18% annually and terms can last for 6 -12 months. Many times these rates vary depending on your credit score and experience. In most cases, there will be closing costs or fees to use hard money. Typically hard moneylenders will charge anywhere from 2-10 points just to use their money. One point equals one percent of the mortgage amount. So charging 1 point on a $100,000 loan would be $1000. These are all important things to consider when choosing a hard money lender.

You also need to be aware of pre-payment penalties. Pre-payment penalties can really hurt your deal and cut into your profits substantially. Considering the upfront points they are charging you, you should avoid any pre-payment penalties.

Other things to consider are how quickly funds will be available. Many times, when you find a great “as is” REO and want to write an “all cash offer” you need to move quickly. Your ability to get access to money quickly can make all the difference. It’s important to begin relationships with potential hard moneylenders as quickly as possible.

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When should you use a hard moneylender? Hard money is great for beginning investors who may not have money or for those who have bad credit and cannot qualify. Investors also use hard money when they need to purchase quickly. Typical soft money or conventional loans take 30 days or more. A hard money loan can close in 2 or less weeks.

Using a hard moneylender is also a creative way to finance a property. Most like to call it “Nothing Down.” If you can borrow enough money to buy the property, fix it up and then sell it under market value for a profit, then you’ve just made money without any of your own money. Sure it will cost you money to borrow that money, but the rewards out way the expense.

How can you find hard moneylenders? There are hundreds of hard moneylenders waiting to lend you money. Your next-door neighbor may be your next hard moneylender. One way to find a lender is to talk to agents, mortgage brokers and title companies and ask for referrals. They deal with the buyers and sellers of houses every day.

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Another way to find lenders is to search online for hard moneylenders. Some will lend nationwide, but these typically want a credit check. It is best that you find a hard moneylender in your area, one with whom you can meet personally and build a long-term relationship. They want a place to put their money for great returns, and you want to bring those deals to them–it’s a win-win for all.

Now that you know a little more about hard money and how it works, you can make an educated decision when it’s time to go this route. There are thousands of lenders out there so do shop for the best one to fit your needs. Then you can establish a long-term relationship with them. If you use them once and everything goes smooth, you will more than likely use them again.

Foreclosure Investing

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