If your an experienced investor you have probably heard people talk about hard money. I am going to provide a brief explanation of what it is, and who it is best suited for.
Hard Money in terms of Real Estate is basically a private loan against real estate. Typically it is a single person or a smaller company buying the loan and the interest rate is much higher. The qualification process is very different then a traditional mortgage. Hard Money Lenders are most worried about, the quality of the deal, the exit/refinance plan and the borrowers ability to execute that plan.
A hard money loan is very similar to a traditional mortgage. The lender takes a deed on the property, forces you to have insurance, will commonly require you to make monthly payments. The biggest difference is they loan money where traditional banks will not (a property is badly damaged, you only want to own it a short period of time, you need to close really fast, you do not have great credit etc).
Sometimes it seems like Hard Money Lenders speak their own language. But it is very simple once you get the hang of it.
- HML – Hard Money Lender as they are sometimes referred too.
- ARV – After Repaired Value, this is essentially what the property is worth (would sell for) once your plan is complete.
- Points – This similar to a traditional loan. A point is 1% of the total loan amount, and usually due upfront. So if a deal has 3 points, you will have to pay 3% of the loan amount upfront to get the loan.
So if a lender says their lending requirements are:
- 70% of ARV, 3 points, $500 in Processing Fees, 15% Interest Only Loan for 12 Months with a Balloon Payment, No Prepayment Penalty
- 70% of ARV
They will loan you 70% of the ARV they determine. Typically a hard-money company has their own appraiser that they will send out to a property (at your cost). So if a property appraises at $100,000 (after the repairs are completed), they would be willing to loan you 70% of that which is $70,000.
- 3 Points
The lender will charge you 3% of the loan amount to process the loan. On a $100,000 loan, they would charge you $3,000 to establish the loan.
- $500 in Process Fees
This is the flat fee (in addition to the points) that a typical lender will charge to establish the loan. This number will be added to the points and charged upfront. FYI, this varies greatly between lenders, try to get as much information on this as you can upfront.
- 15% Interest Only Loan for 12 Months with a Balloon Payment
This is your monthly payment and your terms. Once again, if we have a $100,000 loan you would be paying $1,250 a month ($100,000 * 15% / 12 months). The full principal amount would be due within 12 months.
- No Prepayment Penalty
This is another area to be careful with. This can vary widely. Some Hard Money Lenders want you to pay back the loan as quickly as possible and do not charge an early payment penalty, while others like the high interest rate and want to be paid a premium if you pay that back early. Factor this into your budget.
Don’t feel stupid asking questions of the lenders. Sometimes there terms are different from industry average, so they are not going to laugh at you if you ask an educated question.
- Most HML’s will force you to have insurance just like the traditional banks.
- In the current market conditions expect lenders to want you to put at least 10% of your money into a transaction.
- Most HML’s will provide a pre-qualification letter to you. They are usually pretty vague but it is always something nice to add to your arsnel.
- Pre-Qualification – Like most banks you typically will have to pre-qualify with HML’s. They will usually run your credit, will want to see your balance sheet and some rough guidlines of your income. The strenght of your deal is highly factored into their decision though. If you have a property under-contract taht will appraise for double your price, most lenders will do it, no matter what your credit is.
- Get a Deal Under Contract and Send them the Specifics – Once you have a deal under contract and you have been pre-qualified you will send the specifics out to the lender. You will send: your purchase price, the escrow documents and your general idea of what you think it will appraise at.
- They will make you an offer – Once they get their valuation back they will let you know what loan amount they are willing to do and the terms of the loan. If everything works for both parties you are ready to close the deal and make some money!
- Close the deal!!!
Where to find them?
I have been working on compiling a list of HML’s in Southern California as there is not a great resource on the internet. But in realty, in most markets there are only a few good ones and if you go to your local REI club the members there should point you in the right direction.