equity capital

The Truth about Hard Money Lenders

So many first time investors are curious about hard money lenders. Who are they? What is it? How do I get some? Is it beneficial? Let me share with you some of the basic principals about hard money lenders. First of all, lets determine what the term “hard money” 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 in that it’s more difficult to obtain, but the terms are very specific and much more strict. They have to be, because most 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 I, not a typical 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 money lender would profit handsomely if they had to foreclose or sell to an end buyer. Now, you will find that many hard money lenders, if they want to stay in business, require more than just equity to qualify. This is because the laws now are favorable for consumers. Consumer protection laws, time consuming and expensive court procedures, and so on have forced some hard money lenders to become even harsher when applying for a loan.

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 70% ARV (after repaired value). This means that a hard money lender can loan you up to 70% 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, and after it is repaired the current fair market value is worth $100,000, then typically they can lend you up to $70,000, 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% – 20% annually and terms can last for 6 months to a few years. 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 money lenders 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.

Nationwide Hard Money Lender List

Other things to consider are how quickly funds will be available. Many times, when you find investment properties, 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 money lenders as quickly as possible. You also need to be aware of pre-payment penalties. Pre-payment penalties can really hurt your deal and cut into your profits substantially. Try to avoid pre-payment penalties.

Many hard money lenders today will also require you to fill out a credit application that may ask you for W-2′s and or tax returns, your most recent pay stubs, and bank statements. Again, it’s all about protecting their assets. 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 whom you deal with.

When should you use a hard money lender? 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. Sometimes that is to long. Using a hard money lender 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 money lenders? There are hundreds of hard money lenders waiting to lend you money. It could be your next door neighbor. The best way to find hard money lenders is to talk to a mortgage company and ask for referrals. You can also call a title company or a real estate agency. They deal with buyers and sellers of houses every day. Shop around until you find the best one that will fit your needs. Another way is search online for hard money lenders. Some will lend nationwide – these typically want a credit check. If you find a hard money lender in your area, they may just do a drive by.

Now that you know a little more about hard money and how it works, you can make an educated decision if you want to go this route. We’ve compiled a list of hard money lenders for your convenience. Understand there are several out there. It is a good idea to 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 went smooth, you will more than likely use them again.

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Hard Money: What Is It and How Do Hard Money Loans Work?

by Joshua Dorkin on December 8, 2006

Most real estate investors hear terms that they don’t understand in the beginning. One of these terms, hard money, is little understood, and frequently asked about. Here is a great explanation of hard money.

What Does Everyone Mean by Hard Money? What is Hard Money

Hard money lenders (HMLs) 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 (percentage-wise) much more then an average mortgage, often times up to twice what a regular mortgage does, plus high 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.

In Other Words . . .

Hard money loans are easily accessed and cut through the red tape. If you can develop a relationship with a LOCAL hard money lender, you can get funds within a couple days, and sometimes with no appraisal or other costs (except for origination fees of course).

Now different HML’s have different requirements and protocol. There is a local HML that only charges 12% interest and 1 point origination if you keep it over a year and 2 more points if you keep it less than a year. He only does 30 year notes, and obviously he wants you to keep it. He has over 1100 notes, so he doesn’t want the hassle. He wants his money to stay loaned out. I have also worked with another local HML who doesn’t charge any points, but he’s extremely fickle and can be hard to work with.

Now the typical HML will charge somewhere right around the usury rate. In Texas its 18% annual, so most HML’s will charge 5% origination and 13% interest on a 1 year note or no points upfront and 18% interest with a shorter call. Now they can get around usuary by shifting their origination fee into a commitment fee (little different protocol), but most HML’s don’t know this.

The beauty of HML’s is that the loan is normally not based on your credit score (especially with local lenders) or at least not on your credit worthiness (assets and income), you can receive funding within a matter of days (normally about 7-14 days) rather than 30 days+, and you can get a loan on any piece of junk that you find. You also are not normally dealing with a processing team. You deal directly with an individual lender. If he or she says yes, then you have the loan. This is quite advantageous versus going through an entire loan committee process or underwriting process.

HML’s on longer term investments are not a good idea, but for short term flips, rehabs, or for the initial purchase, they can be a very strong tool. I started my investing using HML’s, and have made very good money using them. I now use mostly a line of credit from the bank, but it took me several years to work into that. I also now do some local hard money loans to other investors.

Thanks to Ryan Webber for his explanation “in other words” (from our forums)

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Hard Money Lender’s 17 Percent Return Didn’t Last

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Explaining the Methods of Hard-Money Lenders

By Dawn Wotapka


Kathleen Rosen

Leonard Rosen, an unofficial spokesman for hard-money lenders, at an industry seminar in March.

As banks continue tightening their purse strings, hard-money lenders are pouncing on the opportunity to lend to shunned borrowers.

It’s not the major financial firms you’d expect. As we write today, more of these lenders are everyday investors tapping their savings accounts to make a profit doling out mortgages.

So how does it work?

Through brokers, hard-money lenders offer high-interest, short-term loans to borrowers who can’t get traditional bank financing, including investors and people with spotty credit. The interest rate can be in the high teens — compared with less than 5% for bank mortgages — while the length can be as short as a few months.

Hard-money lenders don’t focus much on a borrower’s credit scores. They care more about asset valuations and loan-to-value ratios. Many lenders won’t lend more than 50% to 70% of the home’s value, while banks will lend as much as 80% and government-backed loans can go as high as 96.5%.

Because there is little bureaucracy when compared with big banks, deals can be approved and closed in just a few days. “There’s no red tape,” says Merrill L. Kaliser, co-founder of Longhorn III Investments, a Texas lender and broker.

Typically, individual hard-money lenders are matched with borrowers through loan brokers who make a commission on each deal. As with traditional mortgage brokers, they charge points and fees, which can be several thousand dollars per transaction. Some loans are set up with low monthly payments and a balloon payment due at the end of the loan term — a feature they share with some of the mortgages that contributed to the financial bust.

When the loan comes due, borrowers either refinance into a conventional mortgage, flip the property to pay off the loan or, if those measures fail, extend the hard-money loan. “The hard money loan is an interim loan,” says Sophie Lapointe, a co-owner of Five Star Mortgage in Las Vegas, Nev., which doesn’t do hard-money loans. “Borrowers can position themselves to refinance or pay off their loan within that time period.”

Lenders say that defaults are low, in part because borrowers have plenty of equity tied up in the properties themselves. When a borrower encounters trouble making payments, some lenders will extend the due date or charge late fees to avoid initiating foreclosure proceedings. “We’re really just concerned with the interest on the money,” says Phillip Cujilan, a mortgage broker based in Freeport, N.Y., who connects borrowers with lenders and charges the borrowers 3% to 5% of the loan amount for his work. “We’ll give the borrower enough time to get out of the loan. Foreclosure is the last resort.”

Robert and Yvonne Fassett praise the hard-money business. They secured a loan last year to restructure their finances after a kitchen-cabinet distribution business they owned for 30 years suffered in the downturn, ruining their credit. The couple received a one-year, $120,000 loan with a 12% interest rate.

“The fees and interest rate were no doubt higher than a bank, but it was well worth it since no bank was willing to listen,” says Mr. Fassett, 59

Sam Kohn listened. Mr Kohn is chief financial officer at National Equity Funding Inc., an Irvine, Calif., company that matches private lenders to borrowers. The Fassetts paid National Equity thousands of dollars to arrange the deal.

“We’re thrilled when the banks don’t lend,” says Mr. Kohn, a former car dealer who founded National Equity three years ago. “There is tremendous opportunity.”

Indeed, tight lending these days creates opportunities for hard-money lenders like Joey Messina, a Dallas lawyer who has funded 20 mortgages for up to $102,000. The mortgages carry interest rates of 14%.

For lenders, “the profit potential is much greater” than with traditional lending, says Leonard Rosen, an unofficial industry spokesman. “If you lend on a piece of real estate, you can brag about it, drive by it, smell it, take pictures of it.”

Readers, what is your take on the industry?

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 Evaluating Country Risk For International Investing


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