Hard Money Borrowing -- How Does It Work? When Should You Use It?(By Sharlet Briggs)
You have a low credit score ...show low income ...have no cashflow ...need cash quick to buy or renovate a property. You need hard or private money. Hard or private money lending is when a person with capital (read "cash") lends you money. This money comes with strings attached.
If you don’t understand the strings that are attached when you borrow hard money -- these are the rules that hard money lenders follow to protect their loan -- you will find yourself owing so much that you will never get out of debt or make a good investment.
When you have a property that is below 80% occupancy or needs major renovation, the banks won’t lend you the money, or if they do you have prepayment penalties that don't fit within your flip or refinance plan, thus eating up your profit. You need the money to purchase or renovate a home or property quickly.
The first thing to know is that the "hard money lender" doesn’t emphasize your "creditworthiness" since they are making their decision to lend based off the VALUE OF THE ITEM as collateral and NOT your ability to repay.
The second thing to know is that hard money lenders will typically only lend up to 70% MAX of the current AS IS value of the item or property; they don’t lend 100% because that is how they have plenty of equity to protect their loan should it go into default.
The third is if you understand the unspoken rules of hard money you can negotiate terms and interest rates. The hard money lender looks at you as a smart way to earn passive rates of return well in excess of typical stock funds with MUCH LESS RISK.
To play the Hard Money game, it is important you follow these rules closely.
Rule 1: Learn the secrets to hard money lending so you can better get funds from a lender if appropriate, and b) so that someday when you have the excess capital, you can tap into this simple way to generate great rates of return with very little risk or effort.
Rule 2: Know what due diligence and work you need to do before you ask to borrow the money or you will pay more than you need to.
Rule 3: Pay the hard money lender back as scheduled; you will have a great source for future money.
Because this is easy to get money, you pay a premium for the money.
* First you pay higher than conventional interest rates. Currently anywhere from 12-20% is pretty standard.
* Next, you may pay 5-10 "points". (A point is equal to 1% of the loan amount and is an extra profit center for the lender charged to the borrower for the privilege of borrowing the money. Isn’t life grand to be a lender?)
* Finally, some hard money lenders have "pre-payment penalties" in their loans of 6 months interest if the loan is paid off within 12-24 months.
Again, the reason you are glad to pay this extra amount is because the loan is easier to get than a bank loan and you can get more money quickly, allowing you to do a deal you otherwise couldn't.
For example, if you lock up a $200,000 house for a price of $110,000 we’d all agree that’s a great deal. Now you go to a BANK to borrow the $110,000 and what’s the bank going to say? "Where’s your down payment?"
Even with $90,000 of equity to potentially protect the bank, they will only lend on the purchase price or appraised value, WHICHEVER IS LOWER. In this case, they’ll only lend based on the $110,000!
However, a hard money lender is more than happy to lend up to the 60-70% of the $200,000 as is value.
And this is why you will often turn to them for short term loans to buy a property they plan to resell or refinance fairly quickly.
That said, you need to think like a hard money lender.
Inside the mind of a Hard Money Lender
To maximize your opportunities with Hard Money Lenders, you would do well to learn to think like them. These are items the lender will be evaluating:
* Seasoned hard money lenders only lend based off DEFINITE CRITERIA and not off of emotionally influenced relationships.
* Lend up to 70% of the As Is value (including points, money borrowed for repairs, etc.) MAX! (On upper end homes in an area, I’ll only lend up to 60-65% of the as is value depending on the area.)
* Have the property professionally inspected by an inspector the LENDER hires and "pays" for (which he will add into the money the borrower owes him of course.)
This keeps the lender safe from an investor making mistakes on the purchase and lending on a house with a serious flaw. The property is the lender's security.
* Be sure your borrower has calculated in the cost of all the large capital items needed (along with a contingency fund for the unexpected) and KNOWS what they’re getting into.
* Always get a lender’s title insurance policy. Make sure the title company you work with for closing gets a lender’s title insurance policy. As you would expect, the borrower will pay for this policy. If there is room, this is typically added into the loan principal balance.
* Give the borrower 1/4 to 1/3 of the repair funds (less than that if it’s a lot of money) at closing. Then, the remaining balance is released from escrow as the repairs meet pre-set milestones.
* When lending based on the loan as collateral, get the borrower to sign on the loan both in a corporate AND personal capacity.
Is hard money the right financing plan for your next project? Do your due diligence to ensure whether it is -- and make extra profits on deals you'd otherwise have to pass on.
Sharlet Briggs is a real estate entrepreneur who coaches beginning and seasoned investors to profit through real estate cashflow.
Prior to establishing her coaching business, Success Keyring, Sharlet spent multiple years as a real estate investor, a real estate agent and certified property manager. She has coached celebrities and individuals within the United States and Internationally.
Success Keyring offers a wide range of programs and services – from residential, including foreclosures & mobile home parks, to commercial real estate, unlocking the secrets to real estate including where to find money for deals. The coaching program specializes in Investors who want to duplicate the success of others and step up their level of investments, such as entering the foreclosure market or moving from residential to commercial.
Contact Sharlet Briggs at Success Keyring. Purchase hard money educational audio CD's at http://www.hardmoneymasterkey.com/.
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