HARD MONEY is NOT a good idea.

[James Wise]

I know I know everyone advertises hard money as this great way for newbie investors to get their feet wet and invest in deals they couldn't otherwise afford blah blah blah.

Let's all be real here folks. Hard money is NOT a good idea for you newbies out there. Markets are tight. Competition is fierce. If you are using hard money lenders you'll be pinched from a profit perspective. Not to mention you are new so you'll be pinched on the rehab since you've got no idea or track record. Lastly you'll get pinched on the purchase because hard money offers are way weaker than cash and sometimes even traditionally financed offers from a seller's perspective.

Thoughts?

[Nghi Le]

Having talked to over 100 HMLs, personally borrowed from a couple dozen of them myself over the past 5 years for my own investments, brokered for them, and now am a hard money lender... let me offer some different perspectives.

I definitely applaud those who can avoid hard money and afford to buy deals in cash, but that's not a realistic expectation in the coastal markets.  I'm from Seattle, where the average price of a home is $700k-$800k.  We're still seeing 15+ offers for an ugly unlivable house that's newly listed on the market, and I can tell you the vast majority of those are "cash buyers" who are financing with hard money.  We have HMLs that can move pretty fast here and can fund within 48 hours; actually, half of the local HMLs can fund same-day at the auction.  Local hard money terms here are about 12% interest and 2-3pts for 6 months.  However, there's been a large influx of out-of-state lenders over the past couple years, and you can somewhat easily get a hard money loan, even as a brand new investor, for around 9% and 1.5-2pts these days for a 1-yr loan.

At the same time, I've invested in 8 other states; my cheapest purchase was a $22k property in PA.  I know that hard money financing in lower cost markets can be pretty expensive, especially when the loan amount is < $100k.  In some parts of the midwest, 15% and 6pts is the norm.  Heck, in Brandon Turner's old neck of the woods (i.e. podunk WA), there was only one hard money lender in town and he was charging 10% interest and 10pts.  By the way, he's still actively lending in that area; he has no competition doing $50k loans in rural areas.

I'm curious - for those who are saying hard money is insanely expensive, on which end of the spectrum do you fall under?  I'm also curious to know what experienced investors are paying; in my experience, getting 8% and 1pt hard money shouldn't be that difficult if you're an experienced investor with strong financials (i.e. credit and liquidity).  We've even done loans at better terms than that in the past.

I treat my HMLs as my partners, as an extra set of eyes on my deals.  If they're not going to lend on something, it's probably not a good deal, especially if you're a new investor.  HMLs do their own comps, maybe their own appraisals, review your budgets/scope of work, and conduct their own inspections on draws (when they fund the rehab) to ensure that the contractor you're paying is actually doing work that adds value to the house.  Sometimes they give out referrals to insurance, title/escrow, attorneys, wholesalers, etc. Is it not valuable to have a lender say things like, "Did you know this property was in a flood zone?" or "we're not seeing market rents that high" or "the crime rate in this area is higher than what we're typically comfortable with."  As an out-of-state investor who has never seen any of his properties in person, I find these things incredibly valuable, and it has saved my butt plenty of times.

I can't tell you the number of times a new investor has come to me with a bad deal they to finance, and I tell them to walk away from it. It sounds counter-intuitive since I as the lender just lost a loan, but I can tell you that I won a client for life because I looked out for them.  Did you know that a lender can always protect themselves, even on a bad deal?  It's easy; they just lower their own LTV and make you put in a higher down payment.  Even if there's no margin on the deal (i.e. cost to ARV is 90%), they can create margin for themselves and protect themselves using your down payment.  Your job as the investor is to align yourself with great partners, which includes working with great lenders who don't choose to do loans that they know will screw over an investor.  A lot of those folks are what I call "loan to own" lenders.

I know a lot of investors think, "Why won't you do this loan?  The LTVs are insane!  I'm buying this thing at half price!"  @Steve Morris A good, true lender never wants to take back a property, even at 50% LTV. Do you know why? Because a lender wants to be a lender.  They don't want to fix up houses, manage contractors, manage tenants, list properties for sale, etc.  They have great processes and efficiencies made for lending, not for owning properties.  Every house they take back in foreclosure screws them up, and also gives them a bad rating.  That's why what an investor thinks is a good deal does not align with what a lender thinks is a good deal.

True lenders want zero defaults (even if it's not realistic). There are 3 mitigating factors to consider (from the borrower): experience, credit, and liquidity. Each lender will place a different emphasis on each factor. For example, the largest HML in the country (I don't like to mention names on public forums but it's not hard to tell) used to think that credit scores didn't matter as much, and the average credit scores of their borrowers were in the low to mid 600s. They've since learned their lesson and upped their minimum credit score requirement.

I'll end this by saying... I don't actually/necessarily like to finance brand new investors.  We will if they're a strong borrower and the deal looks good (or they came in via a referral), but from a lender's perspective, newer borrowers generally require more time investment, coaching, training, etc.  And the closing/conversion rate with newer borrowers is lower too; deals either never materialize or fall out more often.  So while new borrowers are wary of hard money lenders, the reverse is also true.