Hard Money Loans
Many deals, especially those involving ugly properties, are funded by what are called “Hard Money Lenders.” These are usually people with money to invest that want a high return and don’t trust the stock market (who does?). Mortgage brokers find these people and put them together with you, the investor. Sometimes it is possible to deal directly with the private lender, which is the best situation. Once they get to know and trust you, it’s a slam-dunk to get the money. Most times you are dealing with the mortgage broker acting in-between.
The rates are usually about 12%. They also charge somewhere between three and eight points. Don’t freak out!!! The cost of the money is not important; it’s the availability that is important. It’s also cheaper than getting a partner and giving them 50% of the profits.
Just plug in the costs to your total costs – like it was a new roof. These people don’t ask for tax returns. They care more about the equity in the property than about you. They will generally loan about 65% of the fixed-up market value minus the cost of the repairs. They will also escrow repair money. It’s possible to get in with no money of your own if you find a good enough deal. I have done it several times!
As with most things in life, it’s knowing what questions to ask. Be safe, not sorry. When you meet someone you are thinking of doing business with, here are the questions to ask: (This will make you sound like a pro).
1. What is the loan to value you will lend? Is it based on future repaired value or my price? Do you subtract repair costs from this?
2. What is the interest rate?
3. How long is the period of the loan?
4. How many points do you charge?
5. What other costs are there? What about an appraisal?
6. Are these costs paid up-front (subtracted from the money you get at closing? Or added to the loan balance?)
7. Do you escrow for repairs? How is the money dispersed? Do you require me to have any of that money in the deal? If so, who holds that money?
8. Do you fund ugly houses? Houses that are in bad areas?
9. Do I need to have vacant property insurance? (VERY EXPENSIVE)
10. Will you loan to a trust if I am willing to guarantee it personally?
11. How long does it take to fund?
12. What kind of checking do you do about me? Do I have to fill out a 1003 (Fannie Mae application form)? This requires all kinds of what I consider very personal information and is none of their business. A credit report should suffice.
13. Will you give me a pre-qual letter that I can submit with my offers?
14. Are you loaning your own money or are you a mortgage broker lending other people’s money? (Private lenders are the best. If you find one let me know.)
15. Do you care if I don’t have any money in the deal to close?
16. Will you loan in 2nd position?
17. What is the term of the loan? Is there a penalty if I run over?
18. Is there a pre-payment penalty?
19. Do you ever loan for a longer period of time?