How much "skin" do hard money lenders generally require... or, what's a good % to propose?

Question

Very hypothetical scenario: I find a deal where I have the opportunity to purchase a dilapidated home for $260k. Rehab costs are $75k. ARV is $490k.

Let's then say I have around $140k cash sitting around to invest, but don't want to tie up the whole thing in one deal, so I go after a hard money lender for a large portion of the funds. How much of that 140k might a lender might want to see me put into the deal?

I know there are probably tons of considerations to factor in. So I apologize for being so vague.

Tom Kern · Answer

Ben, just as Karen stated, the title work and dealing with any liens is what typically holds the purchase closing up.  If there are no title issues then a HML should be able to fund the deal pretty quickly or comfortably in a week.  Local HMLs with the loan decision maker in town can fund deals much faster than out of town HMLs.  I don't like to run fire drills but I have funded deals in as little as four business days after first being contacted about the deal.  An out of town HML could never pull that off.

There are different ways that HMLs fund deals.  HMLs commit to funding the purchase and part or most of the rehab $ but typically hold back this rehab $ and disperse that $ as work is done.  Since the rehab $ is being set aside by the HML the HML charges the Borrower interest on this rehab $.  HMLs handle the safekeeping of rehab $ in different ways.  Some set aside the rehab $ in their own account and disperse as work is done.  However  this practice could lead to double dipping where the HML behind the scenes is lending out some of this rehab $ for other deals.  Still other HMLs escrow the rehab $ with an attorney which is more transparent.  I practice the latter.

Hope this helps.

Account Closed · Answer

Karen Margrave Thank you :)

Karen Margrave · Answer

Ben Kahle A HML can usually close as fast as the title/escrow company can do their stuff.

Account Closed · Answer

Eric Hettena - Thank you! Tom Kern - And thank you as well! I actually have another question - Let's say I came to you with all the comps and numbers and you decided to do the deal with me. How fast would it take before funds could be distributed to the seller? I know that sometimes sellers get cold feet and speed can be a huge factor in closing a deal.

Tom Kern · Answer

Ben, I am a hard money lender who does business in VA.  Here is my two cents for what it is worth.  If you were in my trade area and showed this deal to me and I agreed with your numbers then I would lend 65% of ARV or $318,500.  This would mean your skin in the game would be $16,500 ($260,000 + $75,000 - $318,50) plus closing costs (points and other customary closing costs).  If you are dealing with a hard money lender (HML) who does not know you but does know that you have a lot of cash then he might want you to have more skin in the game because you have the skin.

Other factors that influence a HML is the comfort level with funding a home that is not a first time home buyer home....which could lower the loan to ARV % from 65% to 60% for example.  First time home buyer homes sell year round in our market but people moving up typically do not sell as well year round since these buyers have children and want to move in the summer.

Eric Hettena · Answer

I spoke with a Hard Money Lender yesterday and they lend up to 65% of the ARV.  They do not require any money down, or skin in the game, per-say, but anything left over after the 65% ARV will have to be paid out of pocket.  So hypothetically based on your example of an ARV of $490k they would lend $318k, but after your purchase price and rehab costs totaling $335k you would need to bring that difference to the table.  Also, not accounting for closing costs and any other associated fees.

Just one example based on a conversation I had recently.