Hard Money and How Do I Protect My Deposit?

Question

I’m planning on making an offer on a house tomorrow. If the bank accepts, I need to give a 10% cash deposit within 48 hours. Ok, I’ve got that covered. However, I plan on using a hard money loan on this transaction as well. My RE agent asked how I wanted him to write the contract/what contingencies/etc to include. I’ve never used hard money before so I’d like to write the contract in such a way that if for any reason the hard money loan doesn’t come through, I will receive my deposit back. I’m worried what if the hard money lender appraises the property and thinks it won’t ARV for what I’ve estimated or he rejects the comps I’ve submitted him and won’t fund? (I do have a pre-approval letter, but that means little really).

What contingency am I asking for here? Financing? Due diligence? How long of a time period do I tell my RE agent to write in the contract so I have enough time for a hard money lender to do their due diligence on the property I’ve submitted them and choose to fund? (I realize a RE attorney would be helpful here, but mine is not available for a few days) I’m not sure how long should say I need for the hard money to choose to fund me or not? I’m very concerned with getting back my thousands of dollars deposit if the HML won’t fund and I’m searching the internet for “clauses” to protect my money. Any advice? Thank you all!

Brent Coombs · Answer

@Shannon K., way to put yourself under pressure like that!

Don't be handing over any dollars, except into an Escrow Account that YOU trust. If you are unsure how/who to do that, or how to word your due diligence contingency terms  (as well as that "ability to secure financing" clause), then your Offer would best be served as an understanding in principle - awaiting confirmation from your RE Attorney. [Not legal advice, but hopefully sensible].

And, don't be handing over ANY dollars! (That was worth repeating)!

Charlie Fitzgerald · Answer

Just make sure there is a Financing contingency clause.  Email me if you want me to look over anything for you.  I agree with others remarks about the 10% and especially about the need for that deposit check to be given to title company and the check written to the title company.  I know you are awesome at sniffing out rats Shannon.  Be careful here and if your BS alarm goes off, don't ignore it.

Lucky Ebizugbe · Answer

Make the entire real estate contract, contingent upon the ability to secure financing.  Which covers all types of financing associated with this transactions.  Thus: your 10% down, hard money lender funds, and any other funds that may be associated with this deal.

Good Luck.

Wayne Brooks · Answer

Typically, a cash offer has a 10% EM, a financed offer, 2% or so.  Your offer will be contingent upon financing, not as strong as a cash offer.  Didn't your agent tell you this, or are you using the listing agent?

Shannon K. · Answer

Hi there Darrell.  I've made 1 other offer on a house and they also asked for a 10% deposit to be given within 48 hours. One was a Fannie Mae property. This next house is not. 10% seems to be the norm here in Buffalo? I didn't realize there was room for negotiation there. And yes, I will be cognizant of dates. I was planning on using RCN Capital as my lender. They seemed to be a good fit for what I was looking for after the long chat I had with them.

Shannon K. · Answer

There are not 2 loans for this house. There's just 1 hard money loan I'm trying to figure out how to structure to protect my cash deposit...

Darrell Shepherd · Answer

Hard money rejects 75% of their loans?  Not real hard money then, or a lot of people that don't know their numbers applying for them.

I've never heard of a 10% deposit requirement.  Sounds pretty steep.

Like has been said, your contract has a lot of outs, not sure what the bank will say on a finance contingency on a fire sale, they tend to like cash transactions when they are giving lots of equity away for a fast/easy sale.

Personally I just like to sneak in a long ass due diligence period.  21 days or so should do it, and watch that date, I lost $8k because I tried to cancel last minute the last day and I couldn't get my agent on the phone in 2013.  Not fun.  Who is your lender?  You need to check them out pretty thoroughly, hard money lenders vary greatly based on how they fund their deals.  The vast majority of them are using other people's money so are beholden to their rules and their cash flow.  A true hard money lender is loaning on the property, not the individual so if your deal is straight the money should be there.  LOTS of "Hard Money" lenders that aren't true collateral lenders, though (meaning the asset, not the borrower, is what qualifies the loan).

Billy Smith · Answer

So you are going  to have 2 loans for this house.  Mortgage  companies  do not like  other loans with their  loan.Fact they make you prove you have money in the bank for 60 days with no big moves .

Hard money loans are very hard to get the reject 75% of their loans .They  go over everything  with a fine tooth comb and then some .

Hard Money and How Do I Protect My Deposit?

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