Part 1 - What Exactly is a Hard Money Lender Anyway?
by Steve Cook
Private or "hard money" lenders are private individuals with surplus money
available for investment. Some have deep pockets while some have limited
resources. Based upon their own personal criteria, they lend this surplus money,
primarily on a short-term basis, to real estate investors who use it for a
variety of profitable purposes including buying and repairing distressed
properties.
Why is it called "Hard Money"?
Don't be confused by the term "hard money." It doesn't mean that this money is
difficult to find or obtain. Actually, it is some of the easiest money to
procure. So why is it called "hard" money, you ask? Good question. In the world
of finance, money is either "hard" or "soft."
Hard money has stricter terms and a clearly defined repayment schedule. Softer
money has easier terms and a more flexible repayment schedule (e.g., debt
service subject to available cash flow). In the case of private financing, the
terms for hard money loans are exceptionally harsh with very low loan to values
(LTV's), higher than market interest rates, and a lot of upfront points.
Typical Terms for Hard Money Loans
Terms for these types of loans will vary from lender to lender and will depend
upon the experience level of an investor as well as the length of an investor's
relationship with a particular lender. Generally, a hard money lender will
provide a loan for 50-75% of the after-repaired value of a home at an interest
rate of 12-18% for a period of 6 months to five years. They will also charge
between 2-10 points as an upfront financing fee.
As you invest, you will discover that these terms will vary from lender to
lender. Some will only charge interest while some will amortize their loans.
Some will lend repair money; others won't. Some will place the repair money in
escrow to be drawn out as the work is completed; others will let you leave the
settlement table with it. Some will lend closing costs; some won't. Ultimately,
when finding hard money lenders, you will need to determine their terms and how
they might fit into your plans as a wholesaler.
Lending Criteria for Hard Money Lenders
Like terms, lending criteria also varies from lender to lender. Each has their
own preferences with regard to areas in which they will and will not lend and
types of investors to whom they will and will not lend. Some will check your
credit, some will not. Some will do their own appraisals, some will not. Some
will charge for an appraisal, others won't. Some will charge an inspection fee
for each draw from the repair escrow, others won't. Some will only lend in
certain areas while others will lend everywhere.
Some are more numbers-driven when it comes to decision-making while others go
more on their feelings about you and/or the neighborhood. What about my credit?
With terms so favorable to the lender, most hard money providers are concerned
primarily with the value of the property, placing less emphasis, if any, on the
credit of the payor. They just want to know that in the event the payor defaults
they will possess an asset from which they can extract their original investment
and possibly more. However, this is not to say that lenders desire to go through
the hassle and expense of taking back and reselling a property but merely to
point out that due to the terms of the loan, private lenders are secured, and
feel secure, whether a borrower pays or not.
Hard Money Lenders Are People, Too
You must keep in mind that most hard money lenders are private individuals. They
are not institutional investors who have a set standard of guidelines dictated
by the federal reserves. They can be flexible, they can be tough. They are
people just like you and I. You can talk to them. You can befriend them. You can
laugh and joke with them. They can be your neighbor, your doctor, your attorney,
or your bus driver. They usually don't advertise that they lend money, but
instead are found through word of mouth.
A Great Resource
Hard money lenders are a great resource for real estate investors, particularly
a beginner with limited resources (e.g. cash and credit). Having a hard money
lender on your team enables you to confidently make offers on properties. It
enables you to purchase properties when your offers get accepted, and it
provides you with the funds necessary to do the repairs if needed. In fact, I
have heard of some cases where individuals have even been able to borrow holding
costs, but I have never met any lenders myself who will actually do this.
Bio:
Since 1998 Steve Cook has flipped many hundreds of houses as an active
Baltimore-area real estate investor. Steve's unique specialty is the "flipping
homes 1-2 punch", a proven system of real estate investing that powerfully
combines wholesaling and rehabbing houses. Steve Cook is dedicated to helping
others succeed through understanding and aggressively applying his time-tested,
step-by-step approach to flipping real estate.