Hard Money Loans with down payment requirement?

[Norman Perkins]

I was recently searching for a hard money lender in Florida and came across a company that requires a 10% down payment. I have in the past dealt with hard money lenders and never heard of a down payment requirement. Tat was in 2006 though. Is it standard practice today to pay 10% down for hard money or am I right in thinking that it defeats the purpose. If a buyer as 10% for a down payment, why use hard money in the first place?

[Ann Bellamy]

I want to elaborate a little on what @Jeff S. said, I agree with him, especially on not wanting the property back.

When a borrower defaults, the lender issues a notice of default and proceeds towards foreclosure.

1. Unpaid interest payments mount up.

2. Insurance goes unpaid, and in order to protect the asset, the lender then assumes payment of the insurance policy. If you think it is expensive to insure an empty house during rehab, you should take a look at forced place insurance, which is what goes into effect when the borrower's policy is cancelled. These are out of pocket expenses.

3. Property taxes accrue, and since most private (non-bank) lenders don't escrow insurance and taxes, that can add thousands to the bill. Even if they do escrow, that is only enough for up to one year. If the municipality is quick to apply tax liens and tax foreclosures, then the lender must pay out of pocket for the taxes. In MA and NH, taxes are easily in the 3000-6000 per year range for a property, frequently more.

4. If the borrower declares bankruptcy, the entire process is halted until the lender receives the ok to continue with the foreclosure. I've seen this take a couple of years. #'s 1-3 continue to mount up.

5. Lets assume the borrower didn't pay all his bills. (if he could pay his bills, there would probably not be a foreclosure) Mechanics liens are applied, utility bills accrue for items that are tied to the property.

6. Foreclosure itself took 9-15 months in MA during the worst of it, (court system backlog) and that doesn't include the time for bankruptcy. All the above accrue. PLUS the property is vandalized during that time, probably totally trashed depending on location.

7. Fast forward to the foreclosure auction 3 years later. Public notice fees, attorney fees, auctioneer fees, auctioneer postponement fees, advertising fees - lets say 10-15K depending. Taxes 15K Insurance 10K. What was a 100K principal balance on a property worth say 160K, is now an out-of-pocket amount for the lender of maybe 140 not even including unpaid interest, this is simply out of pocket costs. The trashed property is now worth 100K if we are lucky.

8. At the foreclosure auction, no one bids even 100K, lets say 75K. The lender doesn't want to take that big a loss of the difference of 65K, so takes the property back. He has 140K into a property that someone was willing to pay 65K for. @Jimmy Hong , this $140K is what it costs him to get a "free a clear" property.

9. If lender sells as is, lets say he sells to a rehabber for 100K - he loses 40K plus loses all the interest he didn't get.

10. or: Lender rehabs the property, which now costs him an additional 40K out of pocket to rehab. he's now into the property for 180K. During these 3 years, he has been receiving no interest. I'm not whining, just explaining the reality.

10. Lender sells the property for 180K, less real estate commission of 9K. Utility costs, etc.

11. Lender took 3 1/2 years of aggravation to turn his 100K loan into a 9K + loss with no interest paid.

So you see why lenders don't want the property back. Jimmy Hong, there is no mortgage insurance to magically pay off the defaulted balance. The property goes to foreclosure because that's the only way to get a portion of the balance owed. When the borrower defaults, where do you think the money comes from that pays off the property if the lender takes it back?