Finding A Hard Money Lender Question

[Jason Stewart]

Good experiences and bad please share feedback on hard money lenders you have used to acquire single-fam rehab properties in Austin area. Specifically, I am looking to purchase a SFH with major repairs/upgrades needed (using the BRRRR strategy) rehab and then refi to conventional loan. What type of rates have you seen? What should one look out for? What does the structure of a "good" loan look like? This will be my first experience this type of transaction so I prefer to learn from others' experiences instead of making my own mistakes.

Thank you!

[Alex G.]

A "good" loan is one that allows you to accomplish your goals while minimizing the risk, GIVEN your personal financial situation (cash+credit) and experience.

When I was green, had no track record and practically no money - I paid as much as 21% with interest and other costs. The funds were expensive, but I wanted to do a deal and I knew I wasn't partucularly attractive as a borrower. So to get started I had to find a few spectacularly good deals with a very low LTV for the loan and pay through the nose for the money.

Lenders felt safe enough even with a rookie investor/borrower with very little money out of pocket for me - and they made good money off my projects.

As you gain experience and establish a track record of successful exits out of these loans, the money will get A LOT cheaper and LTVs will get higher. In addition to a traditional hard money lender that will go in the 1st lien positiion, there will be funds available from private lenders willing to loan you in the 2nd and even the 3rd lien position to fund rehab and other expenses, etc. 

What to look out for...

1. Try to avoid shorter term loans of 6-9 months, go for 12 months + option to extend. Sometimes these heavy duty rehabs just don't go according to plans. You got to deal with the city, permits, inspections, etc. You can lose a GC (or a couple of them) in a middle of a long project. 

A long project could start in a very "up" cycle and end up in a down cycle. In recent years Austin has been pretty resistant to that kind of change, though no city is ever totally impervious to a down economic cycle.

Some of the conventional lenders will require at least 6 months seasoning, and sometimes 1 year. So a 6 months HML will mature before cheap conventional loan could be obtained.

2. There are some HML there designed for people who don't have ability to make payments. They wrap 12-months of advance interest of un-made payments into an original loan AND then charge interest on interest. While it's a solution for someone who has no income to support HML interest payments, this money gets VERY expensive.

3. Avoid loans that have provisions to bump principal balance at maturity. I've seen those that require a 5% principal bump if you're 1 day past maturity date.

4. Avoid loans that require financial reporting (i.e., submission of financial statements & tax returns, project accounting, etc.)  prior to maturity and have default clauses if you don't comply with such requests. I had to cancel a loan 1 day before closing where a crafty lawyer for the lender put such provisions in the docs.

5. Request review of the loan docs ahead of closing. I've seen 100 page loan packages that I had to sign to get the money. These days I'd rather sign a standard FNMA Note and Deed of Trust and pay a higher rate, if I have to, than get the cheapest money while having to commit my firstborn. 

Spending 2-3 hours trying to wade through 100 pages of legal docs with some crazy clauses designed by a crafty attorney  - isn't exactly my idea of quality time. Understand that they write these loan docs for publicly traded companies, so the loans a local HMLender is originating could be packaged/pooled/sold/resold/chopped in pieces, etc. 

They want all kinds of controls in these legal docs just in case the market changes and they need to get out of these loans quickly. You can't blame them, it's their money, and they can demand their terms. However, be aware that signing these could put you in a precarious position.

With regard to rates/costs...
 
It's impossible to say what yours is going to be since you're new and your financial strength and cash you've got to put down is unknown. In general right now the rates offered on HML for rehabs are in the 7-7.5% on a low end and up to 14% on a high end.

Points and origination fees vary dramatically too from 1 point to 3 pts. Also note, if you're charged 2 pts on a 6 months long loan that has provisions to extend for another 6 months with 2 pts, you're effectivelly paying 4 pts equivalent on a 12 months loan. 

In general, lower interest, lower origination costs and higher LTV are "reserved" for more seasoned investors with a track record and prior successful payment record with a particular company.

Some companies charge $800-$1600 underwirting / processing fees, while others don't. Some companies require a formal appraisal ($500-800) and a survey ($450-$600), while others don't. 

There is also LTV and LTC difference between loans. The typical loan LTV these days is 70-75% of ARV. As far as LTC, most companies require at least 10% cash out of pocket and fund 90% of purchase + 90%-100% of rehab costs. Some companies charge interest on all rehab escrow funds from day 1, while others charge interest only on rehab funds you have used up. On a large rehab, $100K+ that difference in interest charges could be significant.

If you find a true steal of a deal there are companies and individual private lenders that will fund 100% of purchase.

There is a lot of generalization in all of the above, but that's the reality of the wide range of HMLs in the market out there. The good news for all investors is - HM lenders and their programs have become dramatically more plentiful, cheaper and easier to get in recent years. 

There is plenty for all level of investors and I'm sure there is some for your project, if it has financial merits.