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1 Having Money for Your Deals WHEN You Need It Insert Your Logo or Name Here

2 A GUIDE TO HARD MONEY Table of Contents What is Hard Money?... 2 Who Uses Hard Money?... 4 How Do Lenders Secure Hard Money Loans?... 5 How Does Hard Money Work?... 5 How to Find Hard Money Lenders Conclusion Action Steps Interview With A Hard Money Lender Questions to Ask a Hard Money Lender

3 What is Hard Money? In real estate, hard money is a term used to describe money that is loaned at a relatively high interest rate. Hard money has been termed the loan of last resort but that is not the case for real estate investors. Typically, the person who is using hard money cannot use traditional methods of financing such as going to a bank or mortgage company either because of their credit or because of the condition or type of property. Banks do not make hard money loans. Banks look at a person s ability to repay (credit history, income) and base the loan on that. Hard money is the opposite. Hard money looks at the value of the asset and lends based on the loan to value ratio. Real estate investors use hard money to finance rehab properties (that banks won t lend on ) and to close deals quickly when fast action is required. Hard money lenders, or private lenders, are not leg-breakers or shadowy characters. Unless they are lending only their own money, they are mortgage brokers or loan officers who are, in most cases, licensed by the state. The actual people who invest in hard money lending can be individuals, a real estate investment trust, a third party s self-directed Roth IRA or any other private entity a corporation or LLC. The fees and interest rates are legal and less than what a lot of credit card companies charge. Some mortgage brokers have an actual pool of funds or their own funds that they lend from, but in most hard money loans, the mortgage broker loans money from one private investor on one property. With some firms, a person applies for a hard money loan and the company sends out a bid offer to its private investors. If an investor likes the deal (some just crunch the numbers, others like to physically look at the house), he ll contact the lending company to say he ll take the deal. When looking for a hard money lender, ask if they have their own funds or if they broker through other lenders or private investors. Both ways work, but if you are buying a property that doesn t fit the parameters of your lender s private investors, you won t get the money, even if the deal works on paper. 2

4 Sometimes a deal can go south on you because the private investor who had been scheduled to fund the deal found another deal he liked better and put his funds into it. Make sure your lender follows up with the investor so you are not left us scrambling days before closing. quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget. 3

5 Who Uses Hard Money? People use hard money for a variety of reasons. Because banks and mortgage companies work on strict parameters, some houses cannot be quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, that needs more rehab work than a bank is comfortable with. If a property derives most of its value from the land rather than from the house that s on it, traditional banks and mortgage companies will sometimes hesitate to lend money on it. Hard money loans are often used by people whose income cannot be verified (waiters or self-employed individuals, for example) or people who don t want their income verified (private people who want to keep their business private). Others need hard money loans because their credit is poor or marred. Etiam ultricies nisi vel augue. Curabitur ullamcorper ultricies nisi. Nam eget dui. Etiam rhoncus. Maecenas tempus, tellus eget condimentum rhoncus, sem quam semper libero, sit amet adipiscing sem neque sed ipsum. Nam quam nunc, blandit vel, luctus pulvinar, hendrerit id, lorem. Maecenas nec odio et ante tincidunt tempus. Donec vitae sapien ut libero venenatis faucibus. Nullam quis ante. Etiam sit amet orci eget eros faucibus tincidunt. Duis leo. Sed fringilla mauris sit amet nibh. Donec sodales sagittis magna. Sed consequat, leo eget bibendum sodales, augue velit cursus nunc Real estate investors are the most frequent users of hard money. In addition to having access to the money quickly, many real estate 4

6 investors use hard money to fund deals on houses that they are not going to hold for very long, usually less than six months. It is better to pay 15% interest for six months to a hard money lender than it is to pay 50% to an equity partner who funds the deal. Another reason investors use hard money is that they can often finance the cost of the repairs needed for the property in the loan. How Do Lenders Secure Hard Money Loans? Because hard money loans are often if not always high risk loans, security How Does Hard Money Work? Hard money works on the basis that the lender is taking a higher risk than the points that the lender charges (usually between 3 5 points) for the loan. 5

7 Let s break it down: ARV: $100,000 Maximum Loan Amount: $ 65,000 Purchase Price: $ 50,000 Repairs: $ 8,000 Points (5): $ 3,053 $ 61,053 The maximum loan amount of $65,000 will cover the purchase price, loan costs and repairs and have a little left over. What happens to the left over? Depending on the lender, you may receive it at closing to use towards the repairs or it may be escrowed along with the repair money to be drawn out only when the repairs are completed. Either way, you re paying 15% interest on it until the loan is paid back. If you have the option and decide to take the entire $65,000, the breakdown will look something like this: Purchase Price: $ 50,000 Repairs: $ 8,000 Points (5): $ 3,250 $ 61,250 Extra Cash: $ 3,750 In this case, the hard money lender might cover all the costs of the purchase and repairs. In some cases, the lender will want the investor to put up some of the money, either the repairs or a percentage of the deal so that the investor has some skin in the game. Not all hard money lenders will include the cost of repairs in their loan, even if the purchase price, repairs and loan costs are within their 65% - 70% loan to value parameter. Some hard money lenders will loan only on the contract price. You have to pay the points and the repair costs out of 6

8 your own pocket. If that is the case, the lender may ask you to bring a check for closing costs and a check for the estimated repair costs to closing to be held in an escrow account and used only for repairs. A word of warning. This story comes from an investor who learned the hard but to repair it. That alone cost an extra $10,000+. That was the only time I used that hard money lender. Lenders lend money. They do their own due diligence but that shouldn t have two or more contractors look at the scope of work and give you informal bids on the project so you can be sure that you have estimated the repair costs correctly. 7

9 Upfront Fees: John Corey, of Chelsea Private Equity, LLC says it best: No one should pay an upfront fee. Most loan scams involve a fee to get the process started. Such processes rarely end up with a loan being put in place. That said, no lender (or broker) is going to work without getting paid so there will be a fee paid when the loan closes. Out of pocket or taken out of the loan matters little. It is a cost the borrower will pay after the loan is set up (paid at closing one way or another). Before the Closing: Before you close, you normally have to pay for an appraisal and elementum semper nisi. Aenean vulputate eleifend tellus. quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, arcu. In enim justo, rhoncus ut, imperdiet a, venenatis vitae, justo. Nullam dictum felis eu pede mollis pretium. Integer tincidunt. Cras dapibus. Vivamus Aenean leo ligula, porttitor eu, consequat vitae, eleifend ac, enim. Aliquam lorem Pre-Payment Penalties: Most lenders put a pre-payment penalty in their loan and it s something elementum semper nisi. Aenean vulputate eleifend tellus. quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, arcu. In enim justo, rhoncus ut, imperdiet a, venenatis vitae, justo. Nullam dictum felis eu pede mollis pretium. Integer tincidunt. Cras dapibus. Vivamus Aenean leo ligula, porttitor eu, consequat vitae, eleifend ac, enim. Aliquam lorem ante, dapibus in, viverra quis, feugiat a, tellus. Phasellus viverra nulla ut metus varius laoreet. Quisque rutrum. Aenean imperdiet. three months to complete, a three-month pre-payment penalty is not an issue. By the time your house is ready to sell, the penalty will have gone away. Escrow, Inspections and Draws elementum semper nisi. Aenean vulputate eleifend tellus. quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, arcu. In enim justo, rhoncus ut, imperdiet a, venenatis vitae, justo. Nullam dictum felis eu pede mollis pretium. Integer tincidunt. Cras dapibus. Vivamus Aenean leo ligula, porttitor eu, consequat vitae, eleifend ac, enim. Aliquam lorem Lenders have learned to keep the repair funds in escrow, usually with the title company that closed the loan. When a segment of the repairs is 8

10 completed, the investor notifies the lender who sends out an inspector. The inspector checks to make sure the work has been completed in a satisfactory manner. The lender then notifies the escrow company to cut a check to the investor to reimburse him for those repairs. This protects the lender from getting stuck with a house that the rehabber couldn t complete because he ran through all the repair money, and it protects the rehabber from using his repair money on things other than the project. Know how your lender pays out the escrow money before you take out your loan and especially before you submit your repair estimate list. When you re working with a lender who pays out based on the budgeted amount, estimate a little on the high side. You ll find you need things that aren t in your budget and a little bit extra here and there can help cover those costs. 9

11 Following is a repair budget submitted to a hard money lender: Item: Projected Cost Repair two ceilings $ Tile Kitchen and Bath $ 1, Rehab Bath $ 3, Paint Kitchen Cabs $ Install New Hardware $ Countertops $ Sink/Faucet $ Disposal $ Dishwasher $ Interior Paint $ Light Fixtures $ Switch/Plug Plates $ Cosmetics $ Re-Run Electric $ 1, A.C. Handler Pan $ Exterior Paint $ 1, Refinish Hardwood Floors $ 1, Total: $11,

12 Hard Money Draw Request: Jack Rehabber P.O. Box 1245 Any Town, ST (xxx) DRAW REQUEST Property: 719 Main St. E. Any Town, ST Work Completed as of 6/21/XX: Tile Kitchen/Bath $ 1, Paint Kitchen Cabinets $ Install Countertops $ Install Hardware $ TOTAL DRAW REQUEST: $ 2, Thank you, Jack Rehabber 11

13 How to Find Hard Money Lenders The fastest and easiest way to find hard money lenders is to search online. Enter hard money lender or private money lender plus the name of Hard money lenders advertise in the newspaper classified under Money to Lend or Real Estate Loans. Look in the nearest major city newspaper to you. Check the Sunday paper, not the daily. Look for the ads that say Attention Real Estate Investors or Aenean leo ligula, porttitor eu, consequat vitae, eleifend ac, enim. Aliquam lorem ante, dapibus in, viverra quis, feugiat a, tellus. Phasellus viverra nulla ut metus varius laoreet. Quisque rutrum. Aenean imperdietbusiness, meet them at their office, not yours. Bill Gow, a commercial mortgage broker/ banker advises: Make sure they use a third party MAI appraiser. Ask for and then check their references. Make sure you understand what they are offering and the timetable that they allow. Another way to find hard money lenders is through local real estate investment groups. If you re not aware of any investor groups in your area, go to or click to find a group and then click on your state. 12

14 Real estate agents in your area can also refer you to hard money lenders. Look for an agent who works with investors and give them a call. In addition, some mortgage brokers work with hard money lenders or their own private lenders. If they don t, a good mortgage broker will send you to someone who does. Conclusion Action Steps 1. Contact three to five hard money lenders in your area. Find out their terms and parameters 2. Put in applications with at least two lenders to become prequalified. This will help streamline the process when you find a great deal. 3. If your credit is shaky, clean it up. Companies such as Clean Slate Credit Solutions, or Scorewell can remove outdated and inaccurate information. The better your credit is, the more likely you are to qualify for any loan, not just hard money. 13

15 Interview With A Hard Money Lender So, what do hard money lenders look for in a deal? Glen Coker of Fort Brooke Investments LLC, located in Tampa, Florida, was kind enough to take the time to answer some questions about how hard money lending works. As mentioned before, different hard money lenders have different parameters for the deals they fund. Glen s answers are based on his company s funding parameters and his many years of experience in the mortgage industry. What are the qualifications needed to loan hard money (for instance, do you need to be a licensed mortgage broker?) and does it vary state to state? Yes, we are licensed as a mortgage lender. Different states do have different guidelines. What factors determine whether or not you fund a deal? The equity in the property, the loan to value ratio, and the borrower s credit worthiness are all determining factors. How much does a person s credit score factor in? The credit score is an important factor and we have middle credit score that is required for us to lend money to a borrower. Does every hard money loan cover 100% of the buyer s needs? If you are buying the property right (in his parameters,65% of the After Repair Value), then yes, the loan will cover 100% of the deal. However, there are situations where the buyer feels like a property is still a profitable investment for them even though it may not meet the loan to value ratios and instead of passing on it they will bring money to the table to make the deal work. What documentation is necessary to complete the loan? The application, credit report, clear title, appraisal and a survey are required prior to closing. 14

16 Do you use your own appraiser? Yes, we have our own appraiser that we use who is very experienced in rehabbing properties. How are draws set up/determined? quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget. Where do hard money lenders get the money to lend? Many have their own funds when they start, others have a senior lender that they borrower money from and some pool private individuals money together to lend out. If someone wanted to lend out money how do they go about doing it and what should they look for in a broker? quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget, experience in all facets of the real estate industry. Can they use self-directed IRA funds? Yes, but you would need to talk to your IRA advisor for details. What happens if a deal goes bad? Foreclosure is promptly initiated and a deficiency judgment can be placed against the borrower if all monies owed to the lender are not paid in full. What percentage of hard money loans go to foreclosure? Depending on the lender and the state of the economy it can be any where from1% to10%. During the bust, the numbers went much higher, of course. 15

17 10 Questions to Ask a Hard Money Lender Before Applying for the Loan 1. Do you base your loans on credit scores or on the value of the property itself? 2. Is there a pre-payment penalty? 3. What are your terms? (Points, interest, length of loan) 4. quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget? 5. What paperwork do you need in place to fund the loan? Appraisal: Survey: 1003: Other: 6. quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate? 7. How fast can you fund the loan once the documentation is in place? 8. quis enim. Donec pede justo, fringilla vel, aliquet nec, vulputate eget? 9. How are draws handled? Is there an inspection fee for each draw? 10. Do you have any upfront fees? Except for possibly the appraisal, survey and a credit check fee (usually around $30 - $50) the answer you want to hear is No. 16