Hard Money Loans

[David Braut]

I have been approached by a Realtor whom I know fairly well asking for me to do a hard money loan for a client of hers.  Apparently the client is successful and fairly savvy.  He and his wife run some successful str's and need some money to start another one.  

The property location is in a good location.  They want to borrow $150k with my lien in first position.  Property is listed at $380k.  Term 3-5 years.

Can anyone advise me as to terms I should offer (interest rate, points, fees etc) and anything else I should be looking for to make this loan?  Thanks!

[Jeff S.]

The average in CA is 11% plus 2 points plus doc and broker fees. You might be able to get a bit more in the Central Valley. This would be for a 6 to 12-month hard money loan. To avoid usury, you will need a licensed CA broker to originate this loan. You will also need a lending lawyer to create the loan docs for you. My recent post in this thread references lawyers you can call.

I'm not naysaying, but a 3 to 5-year loan is unusually long for hard money and a bit risky. My first question is why can't they qualify for a better loan now, such as DSCR or even a HELOC? If not, how do you know they'll qualify for a take-out loan some years from now? Answer: You don't, and they don't. Plus, what if you need the money sooner? Nonetheless, this could be a good deal for you and, as @Jay Hinrichs mentioned, a better deal in a retirement plan.

Eyes wide open though. Make sure you confirm the value of the property, the business income and expenses, and confirm the borrower's experience. Lots of cities are restricting STR's so make sure this home is not one of those areas. Alternately, what are the rents if they must convert to an LTR?

If all looks good, I suggest a one-year loan with one automatic one-year extension for another 2 points, subject to on-time payments, taxes & insurance paid, etc. If things are going well after two years, you could agree to a one-year loan modification and another after that. This gives you some outs too.