How to accurately estimate hard money costs?

Question

From reading BP articles and listening to BP podcasts, I’ve learned that hard money costs will be dependent on the project, not the individual’s income or credit score. Therefore, you won’t know how many points or what interest rate you will be charged until after the deal has been reviewed. How can you accurately put together a proposal (in particular the cost of money section) without knowing the points and interest ahead of time? Do you use the “average” points and interest charged? Seems like a chicken or the egg problem here. I want to submit a professional and accurate estimate ahead of time but won’t know some of the variables until after I’ve submitted the proposal.

Bill Gulley · Answer

The rate and points as well as terms (like a 15 year amortization) need to be at those loan terms you are requesting or that you're wanting. Using the highest rates is seen almost like an offer, a lender may take you up on it! They have no problem adjusting your pro-forma estimates to a rate and costs they are willing to offer you.

Call a few lenders. Ask what the range of interest is on the type of loan you'll be requesting or the current rate as applicable. You can also ask about points.

From that, be reasonable, if you're new you won't be getting their best commercial financing arrangement. Ask for the middle of the road, never the high end, you may get what you ask for.

I suggest you never use a "loan calculator", especially provided for by a lender. (I would if they want that as part of their loan package, but I would do my own pro-forma and check the calculator, making adjustment to entries for their calculator to provide similar results, you should always put your own pencil to your financing requests. )

Be conservative with income projections, debt coverage ratios are a minimum of 120/125% and may be higher by location, type of project, experience and asset coverage.

A lender has more data and information than you do, all lenders are conservative and can spot unreasonable amounts in a pro-forma. Doing your homework and being conservative is the best way to impress a lender from your application.

Footnotes: material costs, Subject to price increases. Labor cost and job completion are Subject To Weather. Large jobs can have other contingencies.

Ensure you profit is actually worth doing, lenders don't like thin profit margins as they end up with borrowers walking away. If you're making more than twice what the lender makes, you have a thin deal at least 15%. Consider sales sold at 90% of asking price.

More than you ask for, but follow these guidelines and you can have a good pro-forma. :)

Max Matrin · Answer

Hard money loan calculator is a free tool provided by Kansas City Investor Funding LLC. Please replace the first six example values in the form below to calculate the Total Estimated Costs, the Estimated Loan to Value Ratio and the Estimated Cash Needed From the Borrower to Close as it might pertain to your deal. If the number is not applicable, enter 0.

Andre Brasser · Answer

Thanks Hugh and Nick, appreciated.

Account Closed · Answer

Once you know your approval amount the numbers should be the same.

Points, Interests and terms.

Jeff S. · Answer

Considering you could look at hundreds of properties to find one viable flip, @Andre Brasser, most lenders won't want to review any one deal until you have it in contract.  After you've done enough of these, you'll fee comfortable using rules-of-thumb to screen deals, with reasonable knowledge of what your HML costs will be.  Until then, you'll need all the numbers to make your offer, including loan costs.  You must be able to reasonably estimate these up front.  Period.  That is, there is no chicken or egg.

Hard money lending is a business.  If any lender can't clearly communicate the criteria behind their charges to you, in advance, then find another lender.  Seriously.  I see this a lot and always scratch my head in wonderment.  Lenders will state they charge between 8.99 to 12% interest and between 1 to 4 points, plus non-descript fees.  When you ask them specifically how you can determine what they will charge you, or for a particular house, their answer is, "It's negotiable."

The last time I was involved in a transaction like that, I was buying a car and could almost literally feel the salesperson's eyes sizing me up to determine what he could squeeze out of me.  It's a slimy model, but thankfully, not all businesses subscribe.

A lender can have as arbitrary and convoluted a rate and fee schedule as they want.  It's their choice, but if they can't clearly define the criteria they will use when you bring them a deal, or that you can use on your own to determine your specific costs in advance, how can you do business with them?  That is, how can you screen potential deals with that lender in mind?

You can't.

The simple solution is to vote with your feet.  Find lenders who are respectful, can explain their terms and associated criteria to you simply, and in a manner you can understand to evaluate properties on your own. I know with certainty that these exist, at least in southern CA.

Don't feel you're stuck or have to settle or use crude approximations.

Jeff

James Paine · Answer

I know one of the biggest lenders in your state and they charge 2-3 points and 10%-12% and they lend about 80% of the purchase price and I believe most of the rehab as well.  PM me if you need an intro.

One of the main things is underestimating the time the deal will take and deals that take over 6 months can cost more points as well as more interest.  Plan ahead and be safe.

Chris Dawson · Answer

Every hard money lender I have used functioned similarly to a traditional lender in that they want you to get "pre approved".  When I have done this in the past, the HML will run your credit and check your DTI ratio.  If they don't ask specifically for it, make sure you tell them your investment strategy and the general location you plan to purchase.

With this info, the lender can then tell you beforehand what your interest rate will be, what your payments will look like, and how much they will loan (usually a percentage of the ARV).  You should never have to make an offer on a  property without already knowing what your interest rate will be and how much your lender will lend.

As others have mentioned, you should expect to pay a higher interest rate for your first couple of deals as you are new to this and are therefore a higher risk.  Once you have a few successful deals under your belt, you should see your HML drop their interest rates a little.  If they don't, find a new HML.

Michael Noto · Answer

I was going to chime in on this thread but @Bill Gulley gave an excellent breakdown.

Hugh Ayles · Answer

The safest thing is use a higher amount for unknowns such as interest and points.

Then if the actual quote is less than what you budgeted, you pocket some savings.

If you are new to this business, it is best to not start with aggressive outlooks on estimates, carrying costs, etc.  You might leave a little money on the table but you will be protecting your profits much more than averaging things or taking the lowest guesstimates.

How to accurately estimate hard money costs?

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