By: Stephen Cook
Private--or "hard money"--lenders are private
individuals with surplus money available for investment.
Some have deep pockets while some have limited resources.
Based upon their own personal criteria, they lend this
surplus money, primarily on a short-term basis, to real
estate investors who use it for a variety of profitable
purposes including buying and repairing distressed properties.
Why is it called "hard money"?
Don't be confused by the term "hard money."
It doesn't mean that this money is difficult to find
or obtain. Actually, it is some of the easiest money
to procure. So why is it called "hard" money,
you ask? Good question. In the world of finance, money
is either "hard" or "soft." Hard
money has stricter terms and a clearly defined repayment
schedule. Softer money has easier terms and a more flexible
repayment schedule (e.g., debt service subject to available
cash flow). In the case of private financing, the terms
for hard money loans are exceptionally harsh with very
low loan to values (LTV's), higher than market interest
rates, and a lot of upfront points.
Typical Terms for Hard Money Loans
Terms for these types of loans will vary from lender
to lender and will depend upon the experience level
of an investor as well as the length of an investor's
relationship with a particular lender. Generally, a
hard money lender will provide a loan for 50-75% of
the after-repaired value of a home at an interest rate
of 12-18% for a period of 6 months to five years. They
will also charge between 2-10 points as an upfront financing
fee. As you invest, you will discover that these terms
will vary from lender to lender. Some will only charge
interest while some will amortize their loans. Some
will lend repair money; others won't. Some will place
the repair money in escrow to be drawn out as the work
is completed; others will let you leave the settlement
table with it. Some will lend closing costs; some won't.
Ultimately, when finding hard money lenders, you will
need to determine their terms and how they might fit
into your plans as a wholesaler.
Lending Criteria for Hard Money Lenders
Like terms, lending criteria also varies from lender
to lender. Each has their own preferences with regard
to areas in which they will and will not lend and types
of investors to whom they will and will not lend. Some
will check your credit, some will not. Some will do
their own appraisals, some will not. Some will charge
for an appraisal, others won't. Some will charge an
inspection fee for each draw from the repair escrow,
others won't. Some will only lend in certain areas while
others will lend everywhere. Some are more numbers-driven
when it comes to decision-making while others go more
on their feelings about you and/or the neighborhood.
What about my credit?
With terms so favorable to the lender, most hard money
providers are concerned primarily with the value of
the property, placing less emphasis, if any, on the
credit of the payor. They just want to know that in
the event the payor defaults they will possess an asset
from which they can extract their original investment
and possibly more. However, this is not to say that
lenders desire to go through the hassle and expense
of taking back and reselling a property but merely to
point out that due to the terms of the loan, private
lenders are secured, and feel secure, whether a borrower
pays or not.
Hard Money Lenders Are People Too
You must keep in mind that most hard money lenders
are private individuals. They are not institutional
investors who have a set standard of guidelines dictated
by the federal reserves. They can be flexible, they
can be tough. They are people just like you and I. You
can talk to them. You can befriend them. You can laugh
and joke with them. They can be your neighbor, your
doctor, your attorney, or your bus driver. They usually
don't advertise that they lend money, but instead are
found through word of mouth.
A Great Resource
Hard money lenders are a great resource for real estate
investors, particularly a beginner with limited resources
(e.g. cash and credit). Having a hard money lender on
your team enables you to confidently make offers on
properties. It enables you to purchase properties when
your offers get accepted, and it provides you with the
funds necessary to do the repairs if needed. In fact,
I have heard of some cases where individuals have even
been able to borrow holding costs, but I have never
met any lenders myself who will actually do this.
Proverbs 3:5:6 Trust in the Lord with all your heart,
and lean not on your own understanding. In all of your
ways acknowledge Him, and he will make your paths straight.
About the Author: Steve Cook
Since 1998 Steve Cook has flipped hundreds of
houses as an active Baltimore-area real estate
investor. Steve’s unique specialty is the “flipping
homes 1-2 punch”, a proven system of real estate
investing that powerfully combines wholesaling
houses. Also the founder of www.FlippingHomes.com,
Steve is dedicated to helping others in this thriving
online community succeed through understanding
and aggressively applying his time-tested, step-by-step
approach to flipping
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