Using a Hard Money Lender for first fix and flip deal?

Question

Bob Green · Answer

Ty,

Be prepared for the following. When funding a newbie investor a HML will look at credit score - length of credit and strong liquidity. Typically looking for 4 years of credit history with 4-5 open trade lines. 1st loan will likely require 20% down and fund 80% of rehab with max loan 65% of ARV. Get one property under your belt and loan will become much cheaper with lower down payment.  Hope this helps.

Kim Tucker · Answer

At MAREI here in Kansas City we have about 7 companies that lend hard money and a few private individuals.

Most charge 12 to 16 % interest and 2 to 5 points.  Because there are so many, they do seem to be in a bidding war that could net lower points and lower interest.

Most lend purchase and renovation for 6 months with an option to extend to 9 months to a year, usually with more fees.

They typically want to a credit report and an appraisal and a few fees for application, documentation and they usually charge for draws.Now for how much money you need . . that will all hinge on the particular lender, your experience and what appraises for.

Some are lending only on the deal and don't care about credit.  If the deal makes sense they will lend up to 70% of the after repair value for your purchase and rehab.  You screw up and they get your deal.

Others do want to look at credit and again will lend up to 70% of ARV and the points and interest might hinge on how experienced you are and how many deals you do with them.  If it's your first deal it will be at a higher cost, but if you have completed 4 or 5 deals with them and you know each other's processes, those fees might come down.

And along about deal 4 or 5, then you can start talking to the private lenders at MAREI.  They don't work so hard to keep their money busy, they don't spend money on websites or advertising.  So they usually want experienced investors, the numbers to work.  They don't usually check credit or get an appraisal and they typically only charge interest with a minimum.  So maybe 8 to 10% interest with a $2000 to $3000 minimum.

So get the to a real estate investor meeting or two in Kansas City and talk to the many hard money lenders in the room, there are usually one or two or in the case of the MAREI meeting 5 to 7.

Nghi Le · Answer

The most common hard money terms I see for a brand new investor is 12% interest, 3pts, 1-yr loan, 90% of purchase + rehab (up to 70% of ARV).  In some states, the interest rate may be lower with a higher down payment.

Shari Peterson · Answer

@Ty Miller and @Aaron Brown -- I'm a fellow Missourian and in fact, my daughter is a 5th grade teacher in Independence School District. Aaron is right -- many times you don't need any funding at all if you wholesale. If the contract can be assigned, and the profit is $10,000 or so (or 10% or so on more expensive deals), then assigning is the way to go.

However, sometimes you either cannot or do not want to assign a contract. This is when you use Transactional Funding.

With HUD, REOs, and Short Sales, you are not allowed to assign the contract. You must buy and close on it before you can wholesale it to the next buyer.

If you have a great profit spread, it may be best to buy and close on it first and then have a second closing reselling it to the new buyer that same day. The reason is that you could risk losing that buyer if he thinks you're making too large of a profit. In Aaron's example above, if you get it for $50k and a reasonable price for the next buyer would be $80k, it is unlikely he will pay you a $30k assignment fee. He may insist you cut your profit or he'll walk from the deal. But if you buy it with funding,  and sell it to him for $80k, he won't blink an eye, provided that the $80k is a reasonable amount for him to pay. He won't know you bought it for $50k.

Aaron Brown · Answer

Hello Ty,

A true wholesale deal you won't need to borrow any transactional funding... Which may be a good option for you starting out of you have little or no money to put into a flip.  You use the money from your buyer to pay off the seller, and you keep the difference.

For example, you get a contract for 50k with the seller. You then assign that contract to your buyer for 60k. The buyer wires in the 60k to the title company, the seller gets their 50k, you take the 10k difference.  Make sense?

Let me know if you find any good deals in Independence you'd like to wholesale! I am a fellow investor in Independence, and mainly do but and hold-rentals. I'd be interested in taking a look.

Using a Hard Money Lender for first fix and flip deal?

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