Hard Money Lending, Is it for me?

Question

I'm considering using hard money to lock up some deals and refinance out in 6-12 months, but I'm nervous. What are some things I should look out for, besides high interest rates. What are "good" hard money terms? A majority of the leads I get feel scammy. Any recommendations/referrals?

Ryan Blake · Answer

@Justin Franklin First off, DO NOT PAY SOMEONE AN APPLICATION FEE. Second, NEVER PAY THE LENDER BEFORE CLOSING. I don't think I need to say that again but when there are large fees upfront, it is very likely a scam.Rates and terms are very geographical. This is because the property is what is securing the loan, not yourself and that means certain areas have homes that retain their value better than other areas. I would search around but you should expect to be in the 9% to 14% range with 2 - 5 origination points. The doc fee should be $0 to $1,500. And the lending terms should be 80% to 100% LTC and 65% to 75% LTV. Anything outside of these rangers may be too good to be true or just a really bad deal depending on which side it falls.As for what to look for in a lender... Try this:Do you require an appraisal and survey? Most HMLs will require these. I am wary of the ones that don’t require an appraisal. The lender will perform a desktop appraisal but they will typically have a short view on the value of the property to protect the company’s investment which means you will be coming out of pocket more. Small-time HMLs may not require an appraisal but this could be because they will drive out and view the property themselves. Survey is a toss-up on whether or not it will be required. Is there a pre-payment penalty? Some will require you to pay the interest through the term or another length no matter how long you hold the loan. Just make sure that you include this requirement in your costs. Do you have relationships with refinance lenders? Make sure that they have a good relationship with companies that will refinance the loan for you if you are using a BRRRR method. You want to see something that has low or no seasoning for a cash out refi or that may require low amount of documents. What is your draw fee & benchmarks for the repairs portion of the borrowed money? Know what your fees will be to take out the repair money borrowed. Draws are almost always held back until you reach certain points in the project or that work is completed. They will also charge you to have an inspection by a 3rd party to make sure the work is done. I have seen this range from as low as $100 up to $300. Do I need to pay anything before sitting at the closing table? There have been numerous people on BP talking about how they paid application fees but they could never get their loans closed on any deal brought to the company. This is a practice by some less than reputable companies. One I saw charged $500 upfront to be pre-approved and would never actually fund any loans. Just beware. Most reputable HMLs will not charge anything until you are sitting at the closing table and all fees will be listed on the HUD-1 closing document. And of course, what are the points, interest, and attorney/document/admin fees for the loan? This will vary based on region but in general 2 – 5 points, 9% - 14% APR (meaning this is the annual rate so divide it by 12 to get the monthly interest amount), and documents fees can be from $600 – $1,900. The document fees are what will vary wildly from company to company. Just know them going in so that you can properly budget. You will also want to find out if payments are interest only or if some principal is built in. Most hard money will be interest only payments on the full approved balance of the loan whether or not if you have pull the draw funds for repairs. If you have any other questions, post them below so that we can all learn from the answers.

Devin Williams · Answer

Ryan Blake · Answer

I did mean LTV (loan to value) but that can be expressed as ARV as well. In short, this number is the ratio of what the Loan amount will be compared to the Value (ARV) of the property. LTV is a lender term so most lenders you work with will use LTV. The unique thing with hard money lender or private lenders is that they will look at the LTV as the value of the after repaired value. Mortgage lenders will look at the LTV as the current value of the property.

Chris Shepard · Answer

What are the origination fees?Does the lender provide full transparency? Are there any hidden fees?Will the lender cover rehab costs?How much of the LTV will the lender allow you to borrow?Is there a dedicated account manager to help you through the process?What’s the turnaround time?Do you clearly understand the terms of the loan?

Lisa Eckman · Answer

@Devin Williams that doesn’t seem right. You should have a breakdown of how the cash to close is derived. If you don’t see it, then ask for it. Something is missing.

Odie Ayaga · Answer

@Ryan Blake's answer is pretty on point and thorough. Did you mean 65-75% ARV though? @Devin Williams I'm assuming repair value is $40K. Everything looks pretty normal except the LTV. Even for a new investor you can get at least 70% unless there are objectionables.

Devin Williams · Answer

Following this thread as our first ever quote from a HML has left us winded to say the least. Being a newbie is more impactful than I thought. Many don't want to have anything to do with us without ever seeing the deal and when we did present a deal a good deal mind you. Here are the terms.Appraised/After Repair Value: $227,000.00Loan Amount: $123,000.00Loan Number:Rate I/O: 12.25%Loan Term: 12 MonthsOrigination Points: 3.65%LTV: 54.19%Estimated Cash To Close: $51,078.20 (Does not include your EMD and call your title company for a detailed estimate of cash to close)Not exactly what we were expecting on a $83k home