Understanding hard money loans

[Brian Porter]

If anyone could just let me know if I am on the right track here that would be awesome! 

Here is a simple scenario as I understand it:

I find a house with an ARV of $350,000. I offer 70% of that minus $50,000 for repairs bringing a (dream land) accepted offer of $195,000.

Hard money lender most likely gives me up to 70% of the ARV max as a loan or $245,000 (includes rehab costs).

The terms would be:

-30% down - $73,500 

-Loan balance - $171,500

-4 percentage points - $6,860

-15% APR - 6 month project - $12,862.5

Total cost at closing - $80,360 plus origination fees etc...

Total cost of borrowing money $19,722.5

Am I grasping this or am I way off? If this is the case I plan to set aside $150,000 over the next couple of years in order to make sure I have a solid footing before getting into the fix-and-flip game. Does this sound reasonable or should I consider waiting until I have more liquid assets?

I would very much appreciate any input!

Best regards,

Brian Porter

[Ben Stoodley]

Hi @Brian Porter,

Looks like you have the numbers right. I would strongly suggest building a team of a few similar investors that have capital to bring to the table so that 30% down can be fulfilled easier. When speaking with lenders, always check if they allow for other forms of down payment. In other words, do they accept cross collateral, seller financing, 2nd position gap lenders, etc. as a form of your 30% down payment. These are a few ways you can get a deal done with little to no money out of pocket. 

Always clarify with the lender about the requirements for 70% ARV. Every lender is different, but personally, we will never finance 100% of the project even if 70% ARV would cover all the expenses. In other words, the borrower always needs to have some "skin in the game", which I feel is pretty consistent across the board. So we look at both the ARV and Purchase Price. We will do up to 70% ARV or 80% Purchase Price + 100% Rehab costs, the lesser of the two.

Most lenders will prefer to hold the rehab expenses in a fund control, be sure to ask about these requirements. Do they need to inspect the project before each draw? Do they charge you a fee for each draw, or for using fund control? In general, this fund control fee along with all other fees (besides origination and doc fees) are completely unnecessary and completely avoidable. 

Always be sure to check for no prepayment penalty. Your example had an high interest rate of 15%, I would say here in CA you can get much better, 8-12% depending on the lender. Regardless, make sure there is no prepayment penalties. 

Hope this helps.

Good luck!

-Ben