LOAN BROKERS - CAN WE PICK YOUR BRAINS? Hard $, Pvt. $, Direct Lenders, etc.

[Karen Margrave]

LOAN PROS, often I see on BP questions on Private money, hard money, direct money lenders, etc. Though I'm knowlegable on hard money loans, I know there are many out there that are curious and would appreciate picking your brains. Here's some questions I think will help the conversation:

1. What is the difference between private and hard money?
2. What does it mean "direct lender"
3. What are the criterias your investors ($ people) use to determine if they will make a loan (loan amounts, ROI, type of property (SFR, Multi Family, Office, Industrial, Land), area of country, credit scores, experience of borrower, new construction, rehab, etc.) ?
4. Do you have different classes of investors? (those that will only take certain credit scores or other criteria, and those that take more risk, etc.)
5. What LTV do your investors want, points and interest? Maximum loans?
6. On income properties what are the CAP rates investors are looking for? (or is that relevant?)
7. Tell us the #1 thing borrowers should know to get the loan they are looking for?

[Ann Bellamy]

Originally posted by Karen M.:

1. What is the difference between private and hard money?
2. What does it mean "direct lender"
3. What are the criterias your investors ($ people) use to determine if they will make a loan (loan amounts, ROI, type of property (SFR, Multi Family, Office, Industrial, Land), area of country, credit scores, experience of borrower, new construction, rehab, etc.) ?
4. Do you have different classes of investors? (those that will only take certain credit scores or other criteria, and those that take more risk, etc.)
5. What LTV do your investors want, points and interest? Maximum loans?
6. On income properties what are the CAP rates investors are looking for? (or is that relevant?)
7. Tell us the #1 thing borrowers should know to get the loan they are looking for?

.

1. Private money means non-institutional money, therefore virtually all hard money is private money. The term private money, in common usage, typically means money from a private person not in the business of lending, who charges lower rates than hard money. An example might be friends, family, or other preople you know who are interested in what you do. The term hard money originates from a loan based on a hard asset. Originally, all mortgage lending was asset based, and not person-based, before credit scores and dti's came into common usage.

2. Direct lender means the company you are talking to is the one providing the funds, and making the lending decision. It is usually meant to differentiate from a mortgage broker.

3. The answer to this one is going to vary by each person or company. Since I lend my own funds, plus separately those of my private investors, I don't even have a single answer.

In general, we lend at 60-70% of ARV (70% is for very experiernced borrowers that we have history with), for 6-12 month terms. We don't use credit scores, dti's, or other personal qualifications. We lend only in a specific geography, including the eastern half of Massachusetts, and the southern portion of New Hampshire. We lend construction loans for rehab projects, occasional acquisition of buy and hold properties, and a few other odds and end of commercial properties. The important factors are:
1. Location
2. Skin in the game
3. Experience of borrower
4. Exit strategy
5. How easily could we sell the property if we had to take it back
6. The most important first question also discards any borrowers with any intent to use the funds for any household or residential purpose

This is not meant to be a solicitation, simply a general answer to a comprehensive question.

4. Yes, and I tailor the deals I send to them accordingly.

5. This varies by investor, and honestly, the answers to these questions also vary regionally. Hard money and private money rates are more sensitive to supply and demand and don't relate to residential mortgage rates. So if an area has few hard money lender but lots of deals, rates will be higher than if the area was awash with cash and few deals. Generally an individual investor wants to stay well south of 500K per loan, and likes to keep their money working. But to specify terms per investor is far beyond the scope of a post like this. You should talk to individual lenders as you may be surprised by the variation in terms.

6. Well, when you say investor, you mean the $ person? That will depend on where the property is, and how much cash the borrower is putting down. Just like with buyers, the cap rate will vary by location and condition. Certainly a property in a good location in fairly good condition will be easier to fund, but will generate lower cap rates. But funding will again be dependent on the experience and cash input of the borrower, and the ability of the borrower to get permanent financing as an exit.

7. If a rehab loan, the #1 thing is the After Repaired Value of the property. Borrowers continually over-estimate this number, which is the number one factor contributing to losing money in a deal. IMHO (#2 and #3 and #4 are underestimating the rehab $ and time, underestimating carry costs, and running out of money with insufficient cash reserves)

Sorry for the long reply, this was a pretty comprehensive series of questions. I think it would be better suited for a series of articles, maybe another lender will chime in with that. :-)