As a seasoned real estate investor, one does not always have access to unlimited funds in the bank. Actually any savvy investor would not be so smart if they did. It’s wise to put your money into cash flowing or cash building assets and bank accounts are not cash building. Therefore, there may be times when even wealthy investors would be smart to use high interest, high-cost hard money to invest in short-term purchases of real estate.
A Hard Money Loan may also be referred to using the acronym HML.
One of my most popular sayings in real estate investing is “the bottom line is the bottom line” (Hence, the name of my favorite tool found here. So, if the cost of hard money has been accounted for in your deal, then hard money is an excellent resource for cash that does not need you to have good credit.
The important take-away from this article is this… DON’T LET LACK OF PERSONAL FUNDS KEEP YOU FROM MAKING MONEY IN REAL ESTATE TODAY. Your lack of knowledge and experience may be a valid reason, but lack of funds is not.
To gain knowledge on how to do deals, making money without using ANY of your own money to buy, I want to invite you to apply for my personal training and mentoring program HERE.
What is a Hard Money Loan?
Hard money loans are collateral-based real estate loans made by private investors instead of banks. These loans fill a need for funding when banks won’t lend for any reason… there are credit problems, or there isn’t time to obtain conventional financing to secure a purchase or get cash from the equity in a property. These types of loans are referred by different names such as hard money loans, private money loans, private equity loans, or bridge loans.
Hard Money” loans or “equity loans” as they are sometimes called refer to non-conventional real estate loans. They are usually funded by private money sources and investors, (not banks), pension funds, etc. Interest rates and points on such loans are usually much higher. Terms can range from 3 to 60 months and percentage rate varies greatly.
Hard Money loans have one basic requirement. There has to be some substantial equity in the property to give the lender a reason to invest their funds in an otherwise risky venture.
Why do they call it “hard money”?
It is difficult to find an answer to this question. I’ve heard plenty of speculation. Some people say that it’s because the money is used for “hard to do” loans. Others say it is because the loans are “hard to get” or “hard to pay.” It is my belief that it is called hard money because traditionally it has been “real money” in the sense that it is not borrowed. Institutions loan borrowed money, and in this sense they loan “soft money.” However, I must point out that things have changed a bit over the years, and these days a good deal of hard money is in fact borrowed. (I would guess as much as 50%.)
What is hard money used for?
Hard Money is generally used as a bridge: a way to get from point A to point B. It is generally a short to medium term solution (1-6 years), and there is nearly always an exit strategy going in.
- Purchase real estate — with a sufficient down payment (usually 30% or more), you can secure a new 1st mortgage with a hard money loan
- Refinance a loan — hard money loans to obtain cash from equity, pay off a balloon mortgage, refinance a delinquent loan to prevent a foreclosure, pay off a Chapter 13 bankruptcy, and others. You usually need at least 30% or more residual equity left in the property after the new loan, including points and fees, to qualify
- Add a 2nd or 3rd mortgage — hard money loans can be used as subordinate financing to existing 1st mortgages for cash out for debt consolidation, remodeling, repairs, business loans, investments, or for any reason
- Secure a bridge loan to purchase new real estate before selling your current property
- To complete construction or rehabilitation on residential or commercial property
Note: The amount of required equity for hard money loans varies by the hard money lender, property type and investor.
Three Things You Must Have to Qualify for a Hard Money Loan
- Sufficient remaining equity in the property (usually 30% or more after the new loan, including points and fees. The amount of required equity for hard money loans varies by property type and investor.)
- An acceptable property in a marketable area (at lenders discretion)
- The ability to repay the loan to the investor (required by law)
You may qualify for a hard money loan even if- – –
- You have bad credit, minimal credit, or NO credit — sufficient equity and the ability to repay the loan are more important to hard money lenders than your personal credit (However: tax liens, current bankruptcy, judgments, clouds on title, etc., may require resolution prior to or at closing);
- You have too much debt to qualify for a bank loan — provided you have the necessary equity in your property (or down payment) and the ability to repay the loan, our hard money lenders can make allowances for excessive debt;
- You have non-verifiable, inconsistent, or unusual income — provided you can make the loan payment, our hard money lenders will accept loans made to persons who have unconventional incomes. If you have no income or means of repaying the loan, you will not qualify for a hard money loan, period.
- You have a rural property, unique property, or mixed-use property and have found it difficult to qualify for a conventional loan, as long as there’s sufficient equity in the property, and our hard money lender deems the property a worthwhile investment, you qualify for a hard money loan;
- You need a cash equity loan with less than perfect credit and have a 1st mortgage with a negative amortization feature — with the right amount of equity after the required adjustment for the potential negative amortization you may qualify for a 2nd mortgage hard money loan;
- You need a short-term loan to build, rehab, or remodel real estate or make improvements to raw land prior to selling the property or refinancing into long-term permanent financing (note-hard money loans used for these purposes require a future value appraisal and construction documentation for approval);
- The property is in the name of a “non-natural person” — your property is held in the name of a trust, LLC, corporation, or an entity — rather than an individual.
- You need a business loan secured by equity in real estate, but cannot qualify or wait for a conventional business, commercial, or SBA loan;
- You are a Foreign National with no long-term U.S. employment or other assets
Do not consider a hard money loan if- – –
- You would have less than 30% or more equity remaining in the property after the new loan, including any points and fees financed (Note: the amount of required equity for hard money loans varies by property type and investor);
- You are looking for a low-interest rate loan, or a loan with low points and fees;
- You cannot repay the loan according to the terms of the Note;
- You are looking for an unsecured or personal loan, or open-ended line of credit;
- You are not willing to pay for and obtain a current value appraisal, if required;
- You are not willing or able to provide a “future value” appraisal for a hard money construction loan or remodel loan, including an itemized cost sheet, plans, blueprints, a licensed contractor, and permits where required;
- You are looking for an “angel” or speculative investor to fund a project without sufficient collateral or personal equity stake;
What are the interest rates, points and fees?
- Interest rates vary but are not usually less than 11% depending on the investor, borrower qualifications, loan amount and purpose, property type, location, lien position, term, prepay period (if any) and any applicable state law;
- Terms vary between 1 month and 20 years, mostly interest-only (some amortizing loans), depending on the investor, borrower qualifications, loan amount and purpose, property type, location, lien position, term, prepay period (if any) and any applicable state law;
- Points: 2 to 10 points charged, depending on the investor, loan amount and purpose, borrower qualifications, property type, location, lien position, term, prepay period (if any) and any applicable state law;
- Fees: processing, underwriting, title insurance, escrow, doc prep, recording, wire transfer, title messenger, survey, and other fees also apply when applicable. Appraisal fee, where required, is prepaid by borrower C.O.D. at the time of service.
Can the fees be paid from the proceeds of the loan?
Sometimes, if there is enough equity in the project. This is frequently the case.
Is there a pre-payment penalty?
Some come with no prepayment penalties while others have a minimum interest clause. With a 3 month minimum interest clause, for instance, it means that if a borrower repays a loan in 3 months or more, there is no penalty. If the borrower repays the loan, for example in 2 months, then the borrower will have to pay an extra month’s interest out of escrow at closing.
How fast can hard money loans close?
You should figure on at least 2 weeks. (Keep in mind that it is only possible for the lender to move quickly if the borrower, broker and other third parties are moving quickly as well.)
Is an appraisal required?
Most hard money lenders require them. Some individual lenders may go off of comps.
How do I go about doing a hard money loan?
There are basically four steps.
- Find and interview potential resources. You will need to ask for referrals from others in the business, do an online search OR Advertise for it. Feel free to contact me here if you are looking for a hard money lender. I am happy to share a referral if I have one. My Coaching and Training offers resources and scripts for hard money lenders in many states.
- When you find a deal is accepted by a seller (signed purchase agreement) , run your deal by a couple of those hard money lenders you had talked to, to get written quotes and terms.
- Be prepared to email a loan packet. This might include comps, photos, copy of contract for property.
- If the property checks out to have equity required by lender, the loan is closed through escrow.
What needs to be included in a hard money loan package?
A private money loan packet is generally fairly straightforward and varies by lender.
Principles of Hard Money Lending
- HMLs are property based; they do not look to the creditworthiness of the borrower. The security for the loan is the property not the person…just the opposite of conventional lenders (e.g. banks).
- HMLs interest rates usually range between 12-18 %/yr w/interest payments only.
- They charge 3 to 10 points per loan. 1 point is 1% of the loan amount.
- Loan to Value ratio: generally 50 – 70%
- In wholesale markets, HMLs loan 50 – 60% of AIS (As It Sits).
- In retail markets, HMLs loan 60 – 75% of AIS.
- If you intend to rehab, some HMLs will lend on ARV (After Repair Value).
- Call date: ranges from 6 mos. to 3 yrs., and the loan is always called upon sale of the property.
REMEMBER: It’s not the cost of capital that’s important when there’s a good deal out there; it’s the availability and speed with which you can get the money to seize the opportunity.
Why hard money lending works:
- Requires no qualifying and no credit check regarding the borrower.
- Requires no tax returns or financial statements.
- Requires no seasoning; the loan will be based upon the appraisal made by the HML’s appraiser, which you pay for.
- The HML can escrow money designated for rehab/repairs. HMLs will appraise in its AS IT SITS condition; then appraise it in it’s projected AFTER REPAIR VALUE, and will calculate its loan to value on the ARV. Ex) AIS value $100,000; ARV $140,000; assuming a LTV of 70%, the HML will lend $98,000 (.7 x $140K).
What Hard Money Lenders need to see:
- Signed purchase contract.
- Signed Loan Document requiring you to show how you will make payments
- Title work in progress. They’ll want to see a preliminary title report if in California.
- Repair estimates from contractors, possibly 2 – 3 per trade, if funds are to repair/rehab
Ideas for Finding Hard Money Lenders
- Real Estate Clubs. (Search online or here: www.meetup.com)
- “$ to Loan” or financial sections of the classified ads. (www.craigslist.org)
- Other investors (“yesterday’s wholesalers are today’s HMLs)
- Mortgage Brokers – Ask them if they have any non-conforming, high interest, non-qualifying investor type loans where the only lending criteria is the value collateral (collateral with an “equity cushion”, i. e. the difference between the ARV and liens).
- Online Search for “Hard Money Lenders”
- Yellow Pages
- Craigslist.org or other classified advertising. See below for ideas. Feel free to borrow the words below. Just add your name and contact information to these short ads.AD IDEAS:
-Earn 15% on your $ in well secured local real estate projects.
-If you’re not making at least 15% with IRA, we need to talk.
-Money needed to fund local real estate investments.
-I find, you fund, we flip and split profits.
-Real Estate investor looking for money investor.
NOTE. Be careful – Running ads in the paper to raise money for investing purposes can also raise SEC issues. You will probably want to place an ad for the sole purpose of looking for cash to borrow. Advertising to get investors could raise a red flag. I am not an attorney. Please check with your own attorney for laws on this.
Finally – there are many ways to do real estate with little or no money down. Hard money is just one way to lower the need for your own ‘out of pocket’ cash and give you the ability to make money in real estate starting today.
To get started today, apply for my mentoring and training program at: www.coachingu2profits.com
Watch for Future Articles on TRANSACTIONAL FUNDING, NO-MONEY DOWN DEALS and HOW TO FUND YOUR DOWN PAYMENT.