Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
Hello BPers!
I tried searching the recent posts, but couldn't find this question and I am sure its an easy one to answer. I am switching my short term investment goal to fix and flips and have begun looking into hard money loans.
My question is regarding the database of hard money lenders here on BP. Most of the advertised lending is 60-80% LTV. What exactly is the value they reference? Is this the value the county appraiser will give the property? The After repair value of the property? I have found only 2 lenders that explicitly market their loans as ARV loans.
1. The Norris Group
2. Rehab Loan Group
Both are based out of Riverside, CA. I read @Brandon Turner 's book on investing with low and no money down and he identified hard money as a potential source for no money down investment strategies. Is it very difficult to find hard money lenders to finance the purchase price and rehab costs of a flip? I understand it is risky for them, so how do newbie investors like me convince lenders to lend to us?
Lender · Reading, PA · Member since 2012 · 22 posts · 6 votes
10y
I guess that's the misunderstanding for many newbies. If they have a deal where they can purchase and rehab and be under the 65% ARV why aren't there Many lenders doing those deals? At least state that the 65% is Purchase price not After Repair Value. That's just misleading in my opinion.
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
10y
In order to use hard money for any deal, it has to be a very profitable deal for it to make sense. What lenders are looking at is the risk involved. What is the borrowers experience in such a venture? Where is the property? What does the collateral for the loan consist of?
Most lenders have their own valuation system. Some require actual appraisals, some use their own comps, etc., you need to ask them what their criteria for a loan is, how to they decide values, etc. terms, points, etc. Is interest paid on the full amount of the loan for the term of the loan, or will it be charged for the money used, etc.? There's far more than I can go into here.
I will tell you that if you don't have an understanding of all of this, it may not be the best option for you, as it can cause you more harm than good.
I understand that their is risk and each lender evaluates that risk differently. I just needed clarification of the original question about LTV/ARV. And I'm aware of the point you made about how interest is paid. I have a whole list of questions I've made for myself that I must have answered before I can begin investing. To your point about not understanding all aspects of the deal, my thought is if I can explain the deal to my fiancé who has zero hours spent learning about this and she feels comfortable, then I have a good start to my knowledge.
I guess my next step is to keep looking for HML that will lend to newbies and based on ARV. I have a realtor that I have met with who can work with me on finding conservative ARVs for potential deals. But like you said the HML may have their own way of determining ARV so I guess that will come as I speak to more of them.
Lender · Ladera Ranch, CA · Member since 2015 · 21 posts · 10 votes
10y
Pete
The only way to know is to ask each HML you interview the same question. As mentioned above, some lend only against purchase price, some on both purchase price and ARV, and some only on ARV. There are HMLs that will finance first time investors. The HMLs that lend against ARV or lend 100% of costs (PP and rehab) will typically cost more (higher rates and fees) or they will require a piece of the profits to offset the additional risk.
You need to determine what your specific needs are and search for a HML that will fill all those needs. Alternatively, you may want to find a family member or friend with cash that is willing to partner with you on deals. They provide the cash equity and you provide the sweat equity (find the deals, manage the rehab and sale).
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
10y
@Pete Perez Here in southern California, depending on the city, HML will loan a little higher LTV than in other places. Check out Seattle Funding. Also go online to Scotsmanguide, they have a great matrix that shows various lenders. Then do a search on google for real estate loans, southern california, etc. . There's one lender in SF though I can't remember name off top of my heard, they're TERRIBLE so steer clear (i know someone that used them and it was a nightmare)
Thanks for the advice, Joe. I was actually considering offering part of the profits to offset the risk involved for the HML. I unfortunately don't have family that is willing to invest with me, or partner on deals. I have explored that option at length.
I do however attend a local real estate meetup monthly, so I will try to find someone who'd like to partner with me there. Until then I will just have to keep calling hard money lenders and see if they are willing to take a chance on me.
Do you know of any HML that lend to first time investors based on ARV? Any recommendations are greatly appreciated.
You need to remember that lenders want to lend to people that don't need it. When lending at high LTVs or ARVs the lender becomes more of a partner. In case of a default in a true ARV transaction the lender will not be able to sell the property at auction. Therefore, the lender will have to finish the house themselves and sell. Investors get into lending because it is a passive income. Most don't get into lending to acquire through default. Also, if two lenders are advertising 65% ARV doesn't mean they are offering the same product. Private funds are more complex than most realize, so the mechanics and structure are almost always unique.
Lender · Ladera Ranch, CA · Member since 2015 · 21 posts · 10 votes
10y
Pete
I think the best place to find private money or a HML that will lend only on ARV are investor clubs. Ask around at the meeting for sources. It's best if you have a specific deal to talk about.