Fist time investor using hard money?

Question

My partner and I are just about at the last leg to begin to invest. We don't have money to put down so I'm thinking our only option is to use a hard money loan. Do hard money lenders have an option to be pre-approved? I'm asking this because the DFW housing market is very hot. Houses don't stay on the market very long and many get multiple offers on a property on the first day. We would most likely miss out on a property if we have to give the hard money lender the property and also have someone out to estimate the rehab costs to present. Also it would take days I'm sure to actually get the money. I'm pretty sure the hard money lenders don't pre-approve but I don't have any experience with them. Could someone help me out or also give me other finance options for me that is not private money for flipping.

Much thanks!

Joe Villeneuve · Answer

In addition to what @Brooks Rembertsaid, you must keep in mind that Hard Money isn't a loan...it's a Rehab expense.  If you treat it like a loan you'll lose.

HML has a cost for the money, and the money is a short term use, and payback.  A loan is paid back over time.  You will payoff the HML just like you will payoff the cost of the new floor, cabinets, paint job...etc when you sell the house.  The cabinets will cost you $???? for the cabinets and the installation of them.  The HML will cost you points and an interest rate based on how many months will be using it...until payoff.

One reason I say all of this, is so that you don't look at HML as and expensive loan...it isn't, it isn't a loan, it's a rehab expense.

Joe Villeneuve · Answer

Thanks @Steve Smith

Once I realized this, it made it much easier to look at hard money as a need and great tool, as apposed to a fallback, last resort...with the high cost a penalty for not being able to get alternative financing.

If you look at the actual cost of HML, it isn't that bad.  For an example, let's say we are rehabbing a property that needs $50,000 HML; 5 points (5% one time cost); 15% interest (simple...which actually amounts to only 1.25%/month,...or $625/month).  So, if you rehab and flip the house within 3 months, your cost of HML (rehab money) would be as follows:

$50,000     HML

$  2,500     Points (1 time 5%)$  1,875     Total interest charge based on 3 months of use$  4,375     TOTAL Cost of HML MoneySo, if you had a rehab cost of $12,500 on this property, it would actually be $16,875

It doesn't look so bad (the 5 points, and 15% interest) now.

Alberto Camacho · Answer

You can get approved by HML and I'd recommended you do so before making any offers. The problem you may have is they will want you to have some skin in the deal. If you have a solid 401K of some other property you could leverage you stand a better chance of approval.

I went though this 5 months ago. Approval was straight forward. They look for good credit, your not over leveraged, gainfully employed and 6 months surplus in bank to cover your primary residence with an additional 2 months for any others. At least that is what I was explained. I'd expect most lenders to be similar. They ask for employment stubs, bank statements  and tax forms so get those ready.

Brooks Rembert · Answer

Aaron, lenders I know will essentially "pre-qualify"  you, then provide you with a letter stating something to the effect that you have the cash available to make the purchase.

That is what you can show an agent when making your offers.

Jay Hinrichs · Answer

@Aaron Trudgett

20% in cash plus reserves... is generally what is happening   so if the project is 100k to buy and 50k to rehab  150k total you would need 30k  and some may want you to pay the points up front.. so it could be another 3 to 5k and closing costs as well.

so in this scenario 40k should do it plus another 10 to 20k liquid for reserves.

And really if you do not have this amount of cash you should not be trying to buy and rehab houses.. you would be just another under capitalized investor who risks getting into a project cant finish and ends up losing all their cash.. seen it happen many times.

bring in a cash partner and share the wealth but make sure you have the wherewithal to go thorugh the whole transaction.. and remember its not uncommon to get into a rehab and the cost go up by 10k or more.. what happens then... this is why you need plenty of dough to play in this game.

Joe Villeneuve · Answer

I have 3 sources for HML thru my REI:

1 - 65% Purchase

2 - 70% Purchase + rehab

3 - 100% Purchase + rehab, but the loan must be no more than 70% of the future ARV based on a formal appraisal.

All three options are available to any investor...no matter how new or experienced.  The best place to find HML'ers are at your local REI

Aaron Trudgett · Answer

@Jay Hinrichs

How much money would I need? And I have good credit.

Jay Hinrichs · Answer

@Joe Villeneuve

its opportunity cost is what HML are.. either get one and make money on the opportunity or never partake and make nothing ... that is why HML exist.

@Aaron Trudgett

if you have NO capital your not going to get very far with MOST HM Lenders .

before you flow through a lot of gas and time.. you may want to just call a few and explain over the phone what your cash position is your experience etc.. most will give you a verbal yes we will look at you or no we won't ,,, and that will let you know what you need to do.

There is 100% HML... but generally those are for very experienced folks and long term repeat clients.   Not first timers..

Steve Smith · Answer

@Joe Villeneuve That is one of the best, simplest explanation on HML that I have read.

Fist time investor using hard money?

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