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Updated over 4 years ago, 04/23/2020
Advice for when using Hard Money
Looking for advice from those who have used hard money in the past or looked into using it but didn’t for a reason.
What did you like about it?
What do you wish you knew before using it?
Is it better to show that you are willing to put up some money? Is that even worth it?
I have not yet used hard money and am not sure with the current economy how “easy” the refinance process will be.
@Katrina Gillrup Great questions.. I'm contemplating my first deal using hard money, but have similar reservations.
I havent used it before but i've done my research. YES its better to put your own money up. in fact, they usually require a 20% down payment and like to see a few months cash reserves in your bank account.
I had a terrible HML experience, especially as a very new investor. I had a 3 unit and 4 unit commercial building under my belt already (free & clear, no liens), and had wanted to purchase 2 apartment buildings with a combined 48 units. I got the deal approved, pending a commercial BPO. Terms were 12% interest only for 20 months with an 8% origination fee. Collateral was going to be my two existing buildings plus 10% cash down.
The BPO's came out HIGHER for each of the two apartment buildings, as well as my two properties that I owned. I knew this was going to be the case since I felt like I negotiated the heck out of the apartment buildings, and knew I had increased the value of my existing properties after my purchase.
The HML came back and simply said they cannot fund this deal and will not proceed. After they had a commitment letter with the terms. After ALL of the BPO's had come out higher, for the ones I was looking to purchase and my existing properties. I even requested if I could increase the interest rate, I just simply did not want to lose this deal. Still they didn't budge. They delayed the process so long, that eventually my closing date had expired and I had to walk away from the deal. I ended up spending nearly $3k out of pocket for all of these BPO's. They had essentially denied the loan, and collateral, due to a lack of "curb appeal". I thought as long as the objective BPO's, financials, etc. had come through fine, I would be good to get funded, but it was a hard way to learn that these mom & pop HML's are still going to lend if they think the buildings are pretty or not. They even had seen pictures of the buildings before, knew the locations, etc. but still decided not to fund for their own subjective reasons.
I had the same property management company that I used for another one of my properties, and found out that 3+ years later, these apartment buildings actually sold a couple of times to other investors. They were being listed at 3x what I had them under contract for with very little capex having been poured into them.
I would definitely consider hard money again, but this time I'd try to put something in contractually in the commitment letter to protect my out of pocket costs, explain even better every single aspect about the property, etc. so that the underwriting is more based on objective data than simply someone's opinion.
@Ujwal Velagapudi wow, sorry to hear your first experience went poorly but I really appreciate your detailed response. The HML not coming through after doing all of the work to get the property under contract and then having a hard time refinancing are my biggest fears.
I've used hard money and also worked for a hard money lender. I think too many people make too much of it as if it's this weird, unusual, mystical entity. The long and short of it is it's just a bank like any other. The rates and terms are different, but it's nothing to fear. The part that's of most concern is finding the right one for you (which isn't necessarily the "cheapest"). As you've seen above, people can have bad experiences with them while for others it turns out fine. I've heard the same about conventional banks as well.
I will preface my response with this, I've never used hard money on any of my investments. However, I did loan a small amount to an investor in the Boston area and was only able to get paid back (in full, less legal fees) after engaging counsel. It was quite a learning experience, and would do things very different if I decide to do it again.
The main reason why I wanted to respond to this thread is that given everything that's going on, I'd be very careful in using private/hard money right now. Lending might tighten up (especially commercial/portfolio loans, i.e. if you are buying the properties in an entity), and might need to sell it at a loss if you can't refinance the hard money loan after rehab and tenanting. Good luck!
There are many kinds of hard money companies and individual lenders, there are no "standard" HMLs. The key, in my opinion, is to get references from other LOCAL (to the property) investors who have used them.
For example, some national lenders based on the west coast are horrified that most of the housing stock in the northeast is well over 50 years old, and in many cases can be 200 years old or more. If your lender finds that out at the last minute, you could lose your funding. This is just one example.
Every lender won't have an appetite for what you are doing, so talk to as many as you can. The ability to follow through and deliver what they say they can is in many cases far more important than the rate. References from other borrowers will tell you this. And as you work through kinks in the deal, the integrity of the people you are dealing with may also become critical, especially in a crisis. Like now.
I have a list of questions to ask a hard money lender, and I"m happy to email it to people who DM me with their email address. No charge. I don't do business outside of MA and NH, so I'm not harvesting your email.
@Ann Bellamy Great insight, thank you! I have reached out to people in the area I am looking to purchase, many seem reluctant at the moment because of the unknown.
I have been contacting and questioning lenders myself so your list would definitely be helpful. I will message you. Thanks!
@Odie Ayaga I agree, I will keep reaching out and finding lenders in the area to see who will work best for the situation I am in. I want to be able to trust the company I am working with.
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#4 All Forums Contributor
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Originally posted by @Ann Bellamy:
There are many kinds of hard money companies and individual lenders, there are no "standard" HMLs. The key, in my opinion, is to get references from other LOCAL (to the property) investors who have used them.
For example, some national lenders based on the west coast are horrified that most of the housing stock in the northeast is well over 50 years old, and in many cases can be 200 years old or more. If your lender finds that out at the last minute, you could lose your funding. This is just one example.
Every lender won't have an appetite for what you are doing, so talk to as many as you can. The ability to follow through and deliver what they say they can is in many cases far more important than the rate. References from other borrowers will tell you this. And as you work through kinks in the deal, the integrity of the people you are dealing with may also become critical, especially in a crisis. Like now.
I have a list of questions to ask a hard money lender, and I"m happy to email it to people who DM me with their email address. No charge. I don't do business outside of MA and NH, so I'm not harvesting your email.
Ann,
I think the other thing that the audience needs to know is HML are not forced by law to close on anything regardless if you have a term sheet commitment letter etc.. just like we are seeing banks change their terms over night.. its never done till the mortgage records.
- Jay Hinrichs
- Podcast Guest on Show #222
Good point, @Jay Hinrichs thank you.
@Katrina Gillrup I've use hard money a few times now. Overall, it was a pretty good experience. The few drawbacks I see to using hard money is:
1. The cost: You will have to pay (points) upon closing. This is one way the lender makes their money and it's the cost of doing business. Lenders will usually charge anywhere from 2-4 points depending on your credit, # of deals done ect (think of it like a resume). The better the resume the cheaper the rate. 1 point is 1% of the purchase price.You will also have to pay for wire and draw fees. The wire fee is very self explanatory. The draw fee is the fee you will have to pay for the lender to send someone out to inspect the work that was complete. After a fully satisfied inspection that the work was done they will wire you the funds. This process between wire and draw can be a few hundred dollars each time. So it's best you keep your 'draw's' to 1-2 if possible. The other part of the cost is obviously the interest rate they will charge. I have seen quotes as high as 14-15% interest only and as low as 8.5% interest only. Again- this will vary per deal and per experience. Try and find yourself a lender who will only charge interest on the funds you have 'drawn on' not the entire amount.
For example- you purchase a house for 100k and 50k reno budget and you put 20k down. Instead of paying interest on the total 130k- Find a lender who charges interest as your request the money. Meaning you should only be paying interest on the 130k towards the very end of the project after you have requested ALL of the 30k reno.
2. Execution: What i mean by this is: the time it takes the lender to send someone out to inspect the property (that the work was complete) until the time the money is wired into your account. A lot of contractors want to be paid 1/2 up front and the rest upon completion. This makes it very challenging as you have to come out of pocket initially for each part of the rehab. Say your contractor finishes the job and wants to get paid. You have to explain that he cant get paid until you receive your wire. This can take up to a week from the time you call.... ask for the draw.... they send out an inspector.... he does he report, verifies the job and they wire you the money.
One thing I have been doing is calling the lender 3 days before the work is actually complete and requesting the draw. That way... by day 3 and the work is done the inspector is already on his way and my contractor does not have to wait as long.
I hope this helps put things into perspective!
@Michael Doherty Great things for me to know, thank you!
The only time I would suggest using a HM loan on a rental property is when you literally don't have enough cash to do the purchase + rehab without them. For flipping is another story but the only advantage with rentals is that they can make you as competitive as a straight cash offer without you actually having to pay the full amount.
@Katrina Gillrup I hope you'll allow me to weigh in that the advice you've received here is sound. The most important thing to remember is that not all hard money/private lenders are the same. It pains me to hear about bad experiences. The whole idea behind acquiring investment real estate is to expand your portfolio and to do so in a way that smoothly meets your objectives. You are so smart to do your due diligence and to let those with experience in the Bigger Pockets community weigh in. I strongly believe that every investor needs the perfect dream team, working with just the right contractor, realtor, and funding partner, all of whom have your best interests and success in mind. That is easier said than done but keep doing your due diligence and you will find just the right partners.
@Tammy Richards I appreciate the post! I would love to connect and get more information on different lending options from you.
Sure thing, Katrina! I just sent you an invitation to connect. Looking forward to it and thanks for the opportunity to be of service!