Hard Money Loans for Investors

Hard Money Loans

The reason real estate investors choose to use hard money loans is that they provide a means to purchase and rehab property and make a substantial profit that they may not have without the use of this expensive money. The hard money loans are expensive and even if they were legal for a home owner to borrow from the private lenders offering these loans it would never be advisable. So how hard are these private loans you should ask? The answer is threefold. They are restrictive in loan to value, they are high in rate and high in fees.

Restrictive in Loan to Value.

The maximum loan to value for many hard money loans range from 50% to 70%. No deals are done at the higher loan to value for two reasons. First the hard money lender requires lots of equity in case of default they can list and sell the property quickly because they will in theory be below market value. The reason I say in theory is because there are so many REO’s, Short Sales and foreclosure properties on the market today that what was normally considered an exceptional deal is common place. For that reason The private lenders are more particular about the properties and loans they choose to fund.

Secondly, any real estate investment that has less than 30% equity are not good investments for the investors unless they are purchasing the property for the cash flow. In that case they are long term investments and not suitable for the short term nature of these expensive bridge loans.

High Interest Rates.

Whether you are an investor buying and or rehabbing commercial or residential investor properties the rates are substantially higher than they would be for conventional commercial or residential lending. The rates are higher because the risks are higher. The risks are higher because these loans are not underwritten based on the standard conventional guidelines and there is a very limited or no secondary market for private bridge loans. This is generally not an issue because the borrowers know these are only short term loans. The terms range typically from 3 to 24 months. Therefore, the higher interest rate is of minimum importance because both lenders and borrowers know that the borrowers have an exit strategy to quickly payoff these high interest rate loans. Many lenders require a viable exit strategy before they make the loans.

Higher Points.

Because these loans are short term in nature the hard money lenders always charge discount points. They typically charge 4 to 6 discount points. In addition the private money brokers will charge 2 to 5 points. So on average a borrower is paying 8 to 10 points. Plus closing costs. These are high fees. They only make sense when an real estate investor will make substantially more money and they have no other way to fund the deals.

Why Use Hard Money Lenders.

Simply to make money. As a real estate investor you have choices in financing your deals. You can choose conventional financing that requires at 30% to 35% down payment for properties that are in good shape. There are many other conventional requirements including credit, cash reserves and the current value of the property versus the after rehab value of the property. These all make conventional financing almost impossible.

The other option is to use your own funds and not finance a deal at all. But, most astute real estate investors know that if they can make a net profit of $25,000, $50,000, $100,000 or more using a hard money loan they do not like the fees but they we pay them versus not making any money because of lack of financing.

Hard Money Loans for Real Estate Investors

Hard Money loans are a great way for real estate investors to take advantage of a market where there is an abundance of opportunities for them. Short sales, Foreclosures, REO’s, Rehab commercial and residential investment properties are available for never before seen deep discounts. As a real estate investor now is the time to be in the game and buy as much as you can. But there is a misconception that even though hard money lenders are focused on the collateral that they will do any loan regardless of credit, income,or character.

Collateral is King.

Yes, the main determining factor is not credit, verifiable income, or assets like in a conventional loan. For hard money lenders the Collateral is king. This means that if the collateral is good then there is a good chance for them to do the deal. The misconception is that the collateral is the only thing. No they are not credit score driven, but if you submit a credit report that shows you do not pay anyone the hard money lenders are likely to pass. No they are not income drive. But if you show no ability or history to repay a loan they are likely to pass. If you have no assets, no verifiable income and terrible credit, Hard Money Lenders will still pass on the deal even if the collateral is good with a low loan to value.

Other Factors in Qualifying for a Hard Money Loan.

Because these are private investors they are not blind and they all set their own criteria. The key is that they are comfortable that the borrower will do what they say they will doe (like rehab the home in 30 to 60 days) and pay them back. Therefore a positive track record as a real estate investor and or a good team including Realtor, contractor and loan consultant are all important to them. It is also of utmost important to have a viable exit strategy. It is not good enough to say you will refinance the property if by looking at your credit profile you will not qualify for a refinance loan. Likewise it is not good enough to say you will sell the property if you do not have pre-approved buyers (more than one) waiting to purchase the property.

Hard Money Loans Guidelines.

So we know that the collateral is king and the borrower does not have to meet conventional guidelines to qualify, but there the bridge money investors look at a complete profile and it is important for we are pretty sure you will qualify before you or I invest a lot of time and energy in submitting a deal that has no merit.

Another Misconception About Hard Money Loans.

Some people believe hard money lenders ultimately want you to fail so they can get the property. Truthfully that is not why they are in the business. Just like banks do not want to own REO’s private investors who make bridge loans do not want to own your properties. The reason the offer such low loan to values is if they do need to get involved they can sell them quickly to replenish their funds and do what they do, lend money.

So do not be misled. You must be able to deliver what you said and show that you can quickly take the private lender out of the transaction if you want to take advantage of the market to day using hard money loans. I can help you package your deals so you could qualify.

Hard Money Loans.

The Essence of hard money loans is that they are short term loans made to real estate investors so they may purchase, rehab or purchase and rehab commercial and residential investment property with lots of real equity. For traditional financing the value of the property is the lesser of the purchase price or the appraised value. That definition does not account for distressed property that for any number of reasons can be sold below market and therefore has real equity when properly compared to similar properties. Truly the years have shown that for traditional lending that is the best definition of value. For it is too hard to determine true value and or future value of property that may not be in good condition or may have other appraisal value issues that may stop the property from being sold on the to a prudent consumer.

Hard Money Loans.

Hard money loans are only made to real estate investors and are only made on commercial and residential properties that will not be used by the investor as an owner occupied property. This is to keep in line with the laws of usuary and predatory lending. To charge higher fees and interest rates to consumers is illegal. But, Real Estate Investing is a business and business are theoretically astute enough to determine the risk and reward. Business owners can determine which course of financing they would pursue and if the cost are justified by the potential reward. I would never finance my home using a hard money loan, but I would invest in a short sale property that I can purchase at 30% to 50% of value even if it costs me 10% in fees and double the normal investor interest rate. So even assuming this adds 15% to the costs I would still be way ahead when I refinance or sell the property.

The Short Sale.

In today’s market many financial institutions are willing to accept less than what is owed to them on the sale of a property that they have lent money on to avoid having another none preforming asset on their books. Non performing assets mean that a bank will be judged by federal regulators based on the percentage of non performing assets in the portfolio. If you truly have a book of account receivables that no one is paying you on the value is not there anyway. Banks are not in the real estate management and sales business. Therefore, there is a limit to the amount of properties they can own and manage. All these are reasons to accept less or accept a short sale so that the money you do get will go to work for you right away.

The Short Sale.

Another reason banks accept short sales is that if they have to foreclose on a property that adds costs and the value of the asset reduces greatly if the occupant is evicted. So who is to say the amount the bank accepts as a short sale would not ultimately be more than they may have otherwise gotten off of a deal.

Hard Money Loans and The Short Sale.

That opens the door for investors to purchase homes that they can buy below market value employing the short sale and use hard money loans to finance these deals. The hard money loans will have the benefit of putting little or no money down and potentially, getting funds to rehab the property to make them more saleable or qualify for normal refinancing.

If you have a potential investment opportunity and can use money to purchase and or rehab commercial or residential investment property contact me at louisj@alldominionmortgage.com or leave a private comment below and I will follow up with you to discuss the viability of your financing needs.