The Need for Success Track Record for HML/Private Money?

Question

I will have between 80-90K available and hope to buy houses under 40K here in W PA that have moderate repairs needed. I don't wish to fund it all. My only experience with rehab and hard money was 4 years ago and lets' just say it was a painful learning experience; bad choice of home, bad tenant, etc.

I would "flip" the home to a owner occupied. Are lenders going to want to see a success track record or is it still the deal that enables the loan?

Thanks,

Philip

Chris Martin · Answer

With 80K to 90K available, you 1) don't need a HML for the first deal, although I do respect why you would want to use one 2) can use a low LTV (e.g. 50%) to hopefully avoid grotesque terms, 3) can afford to buy with cash (hopefully at a lower price and higher margins) and possibly fund repairs through a local commercial bank (maybe even private lenders) at very reasonable rates and terms.

Joel Owens · Answer

Yes a nationwide HML will usually be much higher as they are building the risk out. The local HML has a more intimate knowledge of the area,the laws,etc. so can cover risk and chance of default better on the loan. 10 points is outrageous.I looked at rehabbing but I am not that hot on it because of the long hold times involved to an end buyer and all the residential BS red tape the government has enacted. The points aren't as bad if the interest rate is really low.If both are high there are too many HML's to pay those ridiculous rates.

Ann Bellamy · Answer

Philip, Jon is right when he emphasizes local lenders. In my discussions with lenders around the US, I find that rates vary by location, as do customs and practices. Local laws will also dictate some of these differences. Don't assume 10 points. I do know a hard money guy who charges 18% interest and 10 points, but he does the deals that most hard money people won't. Which is to say that he takes on the riskiest projects. Factors that influence your ability to get a hard money loan include the following, not in any particular order: 1. Your experience level, not just with the construction, but with the ability to acquire at the right price, evaluate the end selling price and to price it to sell quickly. 2. The LTV relative to after repaired value 3. The amount of skin in the game (this can be cash or cross collateralization) 4. The location of the property 5. And sad, but sometimes true: The degree to which the lender would like to own the property if you default. This last point is not always the case, but you should be aware of it. Most lenders do not "loan to own" but some do, and some deals by their nature attract that sort of lending. Ask around at your local REIA and ask other investors in your area. You will find the people who have good reputations and who conduct business in an ethical and transparent manner. Always ask about "back end fees" because some lenders will tack on fees and points due at payoff, and you don't find out about them until you are sitting at the closing table. If a lender is not clear about costs and fees upfront, find someone else. For your first deal you will find yourself paying more for your inexperience, but over time you will find more lenders and will have more negotiating power. But don't be so fee-conscious that you ignore the relationship. More and more, hard money and private lenders are valuing the relationship with their borrowers who deliver, and you should value the relationship with the lenders you can depend on. Hope this is helpful.

Jon Holdman · Answer

I've never seen a HML charge 10 points, but I guess its not impossible. Around here, four points and 15% is about the norm for a 70% of ARV deal. How much of your own cash is needed depends on the deal. I know one company here that will do 90% of purchase plus 90% of rehab as long as the total loan is under 75% of ARV. Two points and 11%. The companies I know are just local, though.

Philip Bourdon · Answer

Thanks for the reponse, Jon. I meant simply selling it to someone who will live in it. Is there a minimum percentage that you might think lenders (private) would want me to put in? Of course, the HML are going to charge around 10 points and whopping interest. I am assuming the more skin I have in, the more attractive it is to an lender.

Jon Holdman · Answer

What do you mean by "flip the home to a owner occupied"? Do you mean you're going to sell? Move in? Experience helps, but that cash helps, too. If you can fund the repairs and some portion of the purchase, you should be able to find a lender. Hard money is local. You need to find someone who works in your area. There are a few big, national companies, but I think you'll do better locally.