Hard money loan example/explanation

[Casey Jones]

Hello all, 

First time posting here. Long time podcast listener. Would someone please explain the below scenario to me? I understand hard money when the ARV is much higher than the purchase price, but what about when it's not?

Purchase price: $60,000

Repairs: $15,000

Appraisal before repairs: $75,000

Hard money loan: $75,000

Down payment: $25,000

Estimated ARV: $75,000

When the repairs are done and it's time to lease the house, how will the financing look when refinancing to traditional financing? Will any cash above 75% financing be given back to the borrower?  Thanks for your time. I hope I've communicated clearly. 

-Casey

[Jon Holdman]

This isn't a great deal for hard money. Purchase plus rehab is 100% of ARV. This would be a non-starter for most investors because you're paying "retail". Frankly, if you're willing to pay retail you would be MUCH better off to just buy a move in ready house for $75K and get conventional financing right from the start. That will be MUCH cheaper.

I'll assume the HML will lend 70% of ARV at 15% with four points. And that you can then refi using the new value after six months, so I'll assume the hard money loan is in place for seven months. I'll also assume $1000 in other costs to the lender up front (appraisal, underwriting fee) plus another $1000 in other closing costs. I'll assume $3000 in costs on the refi. I will also assume the HML will hold back the $15K rehab budget and pay that to you in draws as the work is completed.

hard money loan: $52,500 (70% of $75K)

points: $3000

HML costs: $1000

other closing costs: $1000

purchase: $60,000

rehab: $15,000

Total money out at closing: $80,000

Less loan of $52,500, cash you need to bring to closing:  $27,500

Now, over seven months you'll make monthly payments of $656.25, interest only.  

Payments for seven months: $4600 (rounded)

You will spend the $15K doing the rehab and then get the $15,000 rehab budget from the HML. So that parts a wash. You will need cash to pay for labor and materials first, then get it inspected and you'll get the rehab money from the lender. Typically in two or three "draws".

Net holding: $4,500 to you (rehab budget less payments)

So, at this point you have $31,900 of your own cash into the deal.

Refi at 75% of new value.

Loan amount:  $56,250

payoff to HML: $52,500

closing costs on new loan: $3000

cash back to you $750

So, you will end up with a $75K property with a $56,250 loan and you will have $31,150 of your own cash in the deal.  I'd say you need at least $5000 in additional cash to complete the rehab.  $10K would be safer, since you will likely exceed your initial rehab budget.

OTOH, if you buy a move-in ready $75K property with 20% down you would put down $15,000 (plus maybe $2000 in closing costs) and have a loan of $60K.  This is a much better approach in a case like this.  Hard money makes sense if you have a much better deal.