Benefits of Using Hard Money Lenders
Still in search for funding for your Real Estate Investment Project? There is a tremendous amount of capital available in today’s market and hard money lenders are funding their share.
From hard money lenders, bank credit cards, lines of credit, private lenders, retirement funds and traditional bank loans, real estate investors are finding the capital they need for their next big project. Hard money loans have not always had fair press, though these types of loans have been a dependable way to fund deals for decades.
The funds come from a group of individuals or a single individual who lends on their own terms. They base their decision on the collateral of the deal. With traditional lending, if your credit score falls below a certain amount then it will be impossible for you to get funded, regardless of the circumstances. Because hard money lenders set their own criteria, they can often fund projects that have been denied by traditional banks. The higher risk is associated with somewhat higher interest rates. They also work quickly to get projects funded, usually within seven days or quicker. A few of the benefits of using Hard Money Lenders are:
- Speed–Regardless of what your offer is the speed in which you can close is more important. Conventional loans can take up to 45 days to close and many conventional lenders have been burned on deals that never closed due to the lengthy closing time. When you place your offer, a seller may take a little less knowing that the property can close in 5 to 7 days.
- Volume – Over the course of a year, closing time within a few weeks means a few more rehab projects which will generate greater returns to the bottom line.
- Quality–With Hard Money in your corner, you can be assured that what needs to be done will be done correctly and you do not have to cut corners to save money. You will earn a better reputation for quality work and more projects.
Knowing that you have a hard money lender behind you can help you build up to bigger projects over time. You start with a single family unit and build up to multi-family and commercial properties. Looking at various projects you may or may not want to use a hard money lenders. There might be some projects that a four percent interest rate will benefit you while some rehab projects demand the speed that hard money offers. The goal, eventually, is to build enough capital that you are able to fund projects yourself without any outside funding.
With hard money lenders behind you, you have the option to look at all projects that come your way.
The fees and interest rates for hard money loans can be higher, but the speed in which you can get a project funded may be worth the extra expense. In a short-term deal, this is a small price to pay to finish a rehab and flip the property. It is worth the relationship with a hard money lender as well as other financing options for choice on a project-by-project basis.
Avoiding Pitfalls with Hard Money Lenders
As first time borrowers from hard money lenders it is a good idea to do some research on the potential lenders. You will also want to create a list of basic questions to query each lender.
If you are thinking about venturing into the world of borrowing from hard money lenders then you have likely already begun to research the process. You know that the loan is based on the value of the property being used as collateral and you know that in most cases the loan will be at most 75% of the value of the collateral. But each lender is slightly different and you should have a list of interview questions prepared to ask each lender.
Important Questions to Ask
The total cost of the loan is really the only number that matters from a profit and loss perspective. Lenders can have different names for the fees that you are paying but you are really only going to compare the final cost. With respect to cost you will want to ask about:
- Points and Interest- lenders have the right to set all of the terms for your loan but you can expect the interest rates to range from 10% to 15% in most cases and the points will average about 4% of the loan amount.
- Upfront fees- some hard money lenders will charge upfront fees for appraisals or document processing- fewer charge an application fee. But be sure to clearly ask for the total of all fees for the loan to eliminate the possibility of hidden expenses.
- Down payment- lenders want to see that the borrower is committed to the deal by including some of their own money in the form of a down payment. Be sure to confirm the amount that is expected as a down payment.
The remaining questions cover the terms of the loan and should be noted to compare timelines and the potential for penalties at the end of the loan term.
- Loan Term- while most hard money loans are short term (12-24 months) there can be occasions where the lender agrees to longer terms. Be sure to verify the terms to know when the final payment or balloon payment will be due.
- Penalty fee- in the event that you cannot repay the loan according to the terms, ask for a written explanation of any penalties that you are subject to owe in addition to the final payment.
- Closing- one of the main reasons for working with hard money lenders is the fast approval and funding. Be sure to get that information in writing so that you can structure your purchase around the funding date.
Due Diligence is a Must
There are many choices out there when you are seeking alternative lenders. So investing time in researching options and specific lenders will insure that you find the best loan terms to meet your specific needs. Having a list of questions prepared before speaking to lenders will allow you to easily gather all of the information you need to make a well informed choice.
Tactics to negotiate a better hard money deal
You may be seeking a hard money loan and looking for the lowest possible interest rate, but there may be additional costs you could be unaware of beyond the interest rate. You will be at a disadvantage if you aren’t aware of these expenses and don’t try to negotiate with your lender.
Some private lenders may earn their profits by charging fees rather than collecting interest payments. In the worst case scenario, an unscrupulous lender could lure in borrowers by advertising a low-interest rate, all the while charging them exorbitant fees. Even if a lender is reputable, borrowers should be aware of any additional expenses when it comes to their loan.
Private asset based lenders are business savvy and approach each loan as a business deal. There is always room to negotiate the terms of any business deal, and the same holds true for your loan.
The most apparent expense on an asset based loan is the point fee, which is a percentage of the loan amount which is paid by the borrower up front. You should do your best to negotiate the point fee because depending on the size of your loan this cost can be considerable.
You as a borrower need to be aware of the cost of your loan in points and any other fees that may apply.
Which fees can you negotiate when it comes to hard money loans?
In the first place, there’s the underwriting fee, which is the cost of a lender’s due diligence. The cost of underwriting can range from 750 to 2,500 dollars depending on an individual deals complexity. In addition depending on your circumstances the cost of servicing your loan could also be a factor. Loan service fees cover the cost of recording payments and generating reports, and this price can be considerable. A lender may charge a fixed monthly payment or charge a given percentage of the loan amount annually.
In addition, be aware of any late fees, or any potential change in your interest rate if you miss a payment. You will want to keep these fees as low as possible because if you miss a payment due to financial difficulties, higher interest rates and late fees will make it harder to catch up.
The main advantage of asset based lenders over traditional banks is that they are flexible and that their is always room to negotiate the terms of your loan. If you don’t try to negotiate these additional fees you may be taking on an unnecessary expense.
Take advantage of the flexibility offered by hard money lenders
Some of the fees mentioned before may or may not apply in your case. But you should try to take advantage of the flexibility offered by private lenders. If you are a borrower with considerable experience and strong collateral on hand, in most cases your private lender will work with you to negotiate any fees.
In short don’t look at an attractive interest rate when shopping for a loan. If you want to get the best deal possible, know the fees that are being charged and to do your best to negotiate.
Hard Money Lenders: What Rehabbers Need to Know
You find a house that you would like to rehab and flip, but you have never done this type of project before. This is what you need to know when considering getting a loan through a hard money lenders.
Time is of the essence when purchasing a property. Especially in today’s market when many sellers are faced with multiple offers. It’s important to have a lender you can work with in a moment’s notice and one that you can develop a long-term relationship with. Various lenders have different requirements. Hard money lenders will either loan on appraised value after repairs or others will loan on the purchase price. You want to find the lender that will loan on the appraised value. A breakdown of the fees will be given to you by the lender, some of them are loan points; closing fees that can include escrow amount, document fees and notary fees; and the interest amount.
Once the hard money lenders decides to proceed on your opportunity, you will have a response such as: “We will lend you 60% of the ARV (appraised repair value), 5 points, 500 document fees, 6-month balloon payment loan at 10%.”
Assuming the property is appraised at $200,000, then your loan will be 60% or $120,000. Upfront costs are $6,000 points plus $500 doc fees. $1,167.60 is the loan payment until the property is sold or 6 months is up.
The Lending Process
- Talk to the lender to see what they require and what you will need
- Find a proper deal and put it under contract
- Contact the lender again and inform them about the property you found, repair costs and what you think the ARV is
- Have the appraiser value the property, either from the loan company or a list that the lender has supplied you
- If the lender requires, place the documents they need in Escrow
- The lender will inform you if they will or will not fund the loan, at what amount, and under what terms
- You set the date to close the loan, either at the title company or the lawyer’s office. The loan company will issue the checks. If the buyer has cash coming back, the loan company will issue this check as well
In recapping, a hard money loan can be used to acquire distressed properties. The speed of the loan is much faster than conventional financing, usually 2-3 days compared to 30-60 days.
The hard money loans are for terms of 1 to 5 years with interest rates of between 10% to 20% and points between 4% to 7%. The advantage of using a hard money lender is that there is a low threshold for the securing of the loan. It is based mainly on the property value and not your credit or income. A drawback is that, with some lenders, you will need to have the cash to do the repairs and either flip the house or rent it within 6 months. Contact Level 4 Funding to talk with the people who know how to guide you through the process. It’s important to consult with experts as you move forward, especially if this is your first adventure into rehabbing.