Can someone “dumb down” this hard money scenario??

Question

Newbie here looking at a great property but haven’t really caught on to how hard money really works. I get it’s a higher interest rate as well as 2-4 points but if I give an example of a property I’m looking at can someone break it down for me on a first grade level?? Lol.

Home is in a great location on a golf course. I could get it off of a wholesaler for $325,000. It needs about $85,000 for the renovation. ARV would be $530,000 or more based on the comps in the area. I have about $35k cash so obviously I do not have the funds to purchase this property and fix it up. I know wholesalers want cash when purchasing. So my questions are the following:

The 10-15% hard money lenders charge:

How is that calculated and is that a monthly expense on me until the property sells?

The 2-4 points:

Is that percentage based on what the property finally sells for or based on the total amount the hard money lender lends?

Appreciate the feed back. Just trying to really understand the process with hard money.

Jay Hinrichs · Answer

Agreed HML underwrite pretty tight these days.. its not just equity based.. they want to know how your going to debt service.

for the very best and experienced clients there is 10% down and 100% for rehab.. but being new I suspect this is not going to be the case plus U would need the 35k just for down payment.. and many want the points paid in cash not rolled into the loan.. some with do interest reserves others you need to show you have the CASH on hand to make payments.

Also for a new rehabber/flipper.. MOST HML will only advance rehab funds for work in place.. Many contractors either wont or cant afford to wait for inspections etc and will demand money up front ( which is a whole nother risk profile)..

Other thing to ask the lender is the interest owed based on commitment or actual funds advanced.. this ping pongs back and forth with the different lenders having to compete with the best borrowers..

Plus the HML is going to want a personal guarantee form you. So look that up and see what it means.. for someone with limited assets or cash it means nothing IE nothing to get if they sue you on the PG.. for others your going to get sued if you have a deficiency.

Bottom line on the deal as presented your undercapitalized .. I would not take that deal on unless you had at least 100k in cash.. 35 to 40k for your down stroke 10% and many lenders you being a newbie will want 15 to 20% of your cash into the deal plus proof you have cash reserves.

Also run the numbers even though the spread looks nice

figure at least 7% of gross for selling costs.

9 month turn around time.. so cost of capital probably very close to 20k.. taxs insurance utls another 5k..

Oops it did not sell for what you want so you took less of a price because you have to sell to retire the HML.

Lastly be very very cautious of what any wholesaler tells you.. Its just a lead you need to verify those numbers with third party experts.

you need a home inspection up front if its city sewer you need to do a sewer scope make sure you waste line is OK.. the end buyer is going to do it.. Etc etc.

Dennis Cosgrave · Answer

It all depends on the hard money lender and the agreement you sign. In most cases, it is a monthly payment just like a regular mortgage. In other cases, the payments are deferred until the property is sold.

The 2-4 points is based upon the amount of the hard money loan.

My bigger concern would be finding a hard money lender, given that you are a newbie. If you have never done this before, it is a greater risk to the lender.

Kenneth Garrett · Answer

@Blaine Cox

Be careful on the numbers as far as ARV and rehab costs. It’s been my experience that wholesalers are usually way high on the ARV and low on the rehab cost. A 20K difference on each end is significant especially on these numbers.

I prefer private lending versus HML (someone you know or met is a private lender; not HML stating private lender). Less points typically 1 or 2 at most sometimes zero. Interest rate 8%-12%. No monthly payments typically. Payback is at the closing of the sale. Great advice from @Dennis Cosgrave and @Jay Hinrichs. I would recommend partnering with an experienced investor/contractor as this is your first deal and convincing someone to lend this amount of money will be difficult, but not impossible. Things can go wrong on a project and if your numbers are off you could be in trouble. With the current Pandemic environment lending is difficult enough.

Have your numbers checked with an experienced investor to make sure your good.

Best of Luck.

Blaine Cox · Answer

@Jay Hinrichs

Thank you for your response. Great info!

Blaine Cox · Answer

@Dennis Cosgrave

Thank you for your response

Can someone “dumb down” this hard money scenario??

Can someone “dumb down” this hard money scenario??

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