Hard Money Basics for an REO

[Zoltan Harta]

Hi BP,

New to the investment world, and very new to Hard Money Lending.  From my basic understanding of this type of financing, it seems to be an avenue for me the near future to get up and running but there are some questions I had (and I apologize ahead of time for any dumb questions):

Q1 - From my understanding, HML will lend an amount to cover cost of home + rehab costs? Is that correct?

Q1A - If so, what happens if I over/under estimate the rehab costs?

Q2 - Is the loan amount collected at time closing? For example and for sake of round numbers, I have a HML loan for $120k ($100k purchase price + $20k rehab cost) with a 12% rate...does the $134,400 get collected at closing of sale of property or is it similar to a mortgage and paid back over the short period of the loan?

Q3 - Do banks accept HML offers on REO properties? If so, is there anything different in making an offer an REO when using HML vs Cash.

Thanks in advance!!

[Andy Webb]

@Zoltan Harta - we buy using Hard Money, but I would say that not all HM lenders are created equal.  I will answer at a general level based on my experience, but you will have to see what the HMLs in your area do.  Different lenders have different programs.  It is definitely a good, if somewhat expensive, way to get into properties that are not in great shape and to leverage your capital.

Q1 - the lenders I work with loan 70%-75% of the ARV (after repair value). We looked at a house recently with $105 ARV. Purchase price was around $50 and rehab around $25. At 75% - the HML is covering both my purchase and rehab costs. We have bought houses where the HM loan did not cover purchase + rehab, so had to bring money to close. Effectively part of the rehab is out of pocket in that case.

I know there are some lenders in the area that loan on cost, but I have no experience with them and I think you have to have some $$$ skin in the game with them.

Q1A - If rehab is higher, then I bring that amount to the table.  I think in your example, it will be the same.

Q2 - I don't fully understand your question, but will try to address what I think you are asking:  all HMLs that I have seen are interest-only loans, held for a very short period of time.  My goal is to buy a house, rehab it, then either sell it and pay off the HM loan or refi into a 30-year FNMA loan if it is a rental.

At the time of the purchase, the HM lender is floating all of the loan to me in effect, with the portion needed to actually buy the property being paid out to the title company at closing; the repair portion is held in escrow and I only receive that once the repairs are made (this can be done at once at the end, or throughout as small draws; thought with an inspection fee).  

IMPORTANT:  since the lender only pays out the repair escrow AFTER repairs are made...I have to be able to float the initial rehab costs.  People have walked off with their funds in the past, so most lenders only issue draws after the work nowadays.

Q3 - absolutely!  You will probably need to do a financing addendum, but I always have our realtor specify in the notes of the contract that it is "hard-money to address property condition" or something like that.  Just once we ran into an issue where the seller (private individual) would not work with us and truly wanted cash.  Most banks and their asset managers should be familiar with HM.

Good luck!