Introduction 2. What is hard money Who uses hard money. 4. Where to get hard money loans Hard money lending today... 6

Transcription

1

2 Table of Contents Introduction 2 What is hard money Who uses hard money. 4 Where to get hard money loans... 6 Hard money lending today... 6 How to apply for a hard money loan... 8 Why use hard money loans Hard money loan tips. 21 Conclusion. 28 1

3 Introduction If you a received a copy of this 28-page report, you just moved a step closer to boosting your real estate investing career with help of hard money loans. Although hard money loans are considered great deal savers by many entrepreneurs and property investors, re are some who are still reluctant to take advantage of benefits that se non-traditional loans bring. Because of misconceptions of many people on hard money lending, y would rar use personal savings or traditional loans to finance a real estate deal. After reading this handbook, you will discover why hard money is perfect type of financing for your business deals, especially real estate investments. You will also learn all things you need to know about when getting a hard money loan. 2

4 What is Hard Money? Hard money is a type of creative financing usually providedd by private investorss and small lending companies instead of institutionalized lenders companies, and credit unions. It is primarily asset-based such as banks, mortgage and a loan s eligibility is determined by assessing value of collateralized property. Because hard money credit score of borrower is not important. If a lender believes is asset-based, that a property, or deal, is good, hard money loan will be provided to borrower. This type of lending is not meant to provide long-term financing solutions. Hard money is usually used as bridge loans, or short-term loans, that enable a borrower to obtain temporary but fast solutionss to a financial problem or to close a business deal quickly. In real estate investing, hard money lenders generally provide around 65% of a property s after repaired value (ARV). That is, if property offered as collateral is valued at $100,0000 in good condition, borrower, can usually get $65,000 from lender. Some lenders go as high as 70% of ARV. Interestt rates, on or hand, 3

5 usually range from 10% to 18% and lenders may charge two to five points of loan for financing fees. The repayment period is relatively shorterr and it ranges from three months to three years, depending on agreement between borrower and lender. This setup provides security for hard money lenders in case borrower fails to repay his loan and y have to foreclose collateralized property. Although obtaining hard money loans can be quite expensive for average borrower, securing hard money for a real estate deal, or any business deal for that matter, can be extremely beneficial to both borrower and lender if deal is structured properly. Who Uses Hard Money Loans? Typically, hard money loans are pursued by borrowers when a traditional loan does not fit ir needs. They are also pursued by those who cannot standards set by comply with lending banks or government- sponsored financing institutions such as Fannie Mae and Freddie Mac. For instance, 4

6 a real estate investor may opt to use hard money if he can t qualify for a conventional loan. He may also use this type of financing if bank or mortgage company is taking too long to process his loan application. A hard money loan is a great financial tool for those who, due to a number of reasons, can t or don t want to qualify for conventional financing. Investors and entrepreneurs with poor credit scores, bankruptcies, no verifiable income, or too much debt are encouraged to use hard money. Investors who are just starting out and are short of investment capital can also benefit from this type of non-traditional lending. In particular, hard money is extremely useful for real estate investors. Many real estate entrepreneurs use this method of financing, especially if y have little time to close a deal. Hard money loans are also ideal for property owners with unfinished or undeveloped properties and are in need of short-term financing. In addition, hard money loans can be used for both commercial and residential real estate transactions. Aside from obtaining real estate, hard money loans can also be used for building and land acquisition, real estate development, second mortgage, non-bankable transactions, foreclosure bail-out, and emergency financing, among ors. 5

7 Where to Get Hard Money Loans As mentioned earlier, private investors and small lending companies with huge capital are usual sources of private money. That being said, a borrower won t get a hard money loan by visiting local bank or government-run lenders. To secure hard money loans, a borrower can approach a mortgage broker who has experience working in lending industry. Hard money brokers are also good sources of lenders because y work directly with private investors who may be willing to fund real estate projects. If he doesn t require services of a broker, however, a borrower may go directly to private lender. When approaching hard money lenders, however, borrowers have to ensure that y have a good amount of equity in property offered as collateral. They should also have an exit strategy in case something goes wrong with deal. Hard Money Lending Today Many hard money lenders went out of business in late 1990s due to booming real estate markets. However, recent years have seen a resurgence in hard money lending business. 6

8 Hard money lending has reestablished itself as an important aspect in real estate investing. As many banks and institutionalized lenders left playing field or tightened ir underwriting guidelines, demand for hard money loans has surged dramatically in last few years, prompting non-traditional lenders to return to market. A recent study by Mortgage Bankers Association showed that over 90% of lenders that took part in survey have or plan to return to business in One of reasons why hard money lending business is showing an increase in activity and enjoying a boost in reputation se days is that borrowers are more comfortable with rates and fees being charged by hard money lenders. Interest rates and fees have dropped remarkably to point that y are almost same or close to rates being charged by banks, mortgage companies, credit unions, and or traditional lending institutions. 7

9 How to Apply for a Hard Money Loan 1. Find a Convincing Real Estate Investment The procedures for applying for a hard money loan vary per lender. Most lenders though use process below. Simply follow se stepss and get closer to securing a hard money loan. If you re not convinced that deal you will need financing for will yield profits, you surely won t be able to convince a hard money lender to provide funding as well. So before you even bor looking for a creditor, look first for an investment property that is surely profitable. Ask yourself many times, Will this deal bring me profit? If you are very certain that this specific investment will lead to gains, n go and seek funding for it. To help you decidee on this, below is a simplified formula used by rehabbers and or real estate investors when determining a real estate investment s profitability. This is basic formula rehabbers and or investors use and it could be more complicated when interests, closing costs, and or expenses are calculated. 65% ARV - Expenses = Purchase Price 8

10 For example, a fixer upper may be sold for $100,,000 once repairs are completed. To raise its price to $ 100,000 you need to spend $15,000 for repairs and anor $5,000 for or expenses. In this example, computation will be: $65,000 - $20,000 = $45,000 In this case, maximum offer you can give to seller is $45,000 (If you sold rehabbed house at $100,000, you ll earn $35,000 minus or expenses like closing and interestss because your total expenses is $65,000). If asking price of seller is way beyond that maximum offer, n you probably found an unconvincing deal. Hard money lenders will notice this and will spot it as a mistake. You can say goodbye to getting approved for a loan. If you stumble in decision-making stage, you are likely to fall before eyes of lender as well. The first step to actually getting a hard money loan approved is being able to determine wher a certain investment is worth making. Is this handyman special worth rehabbing? Keep in mind that hard money lenders will only finance deals that will yield profits so you can return ir money and give m interests and points due. 9

11 2. Find a Reliable Hard Money Lender There are various ways to search for a lender in your area. You may want to ask friends and colleagues for referrals or publish newspaper ads. You can also do it online, which is much easier. You can visit which contains largest database of hard money lenders across United States. Once you ve found a lender, contact it (or him/her if it s a private money investor) and inquire about requirements. Usually, y will need documents mentioned in succeeding portion of handbook, first of which is executive summary. 3. Write an Executive Summary and an Exit Strategy An executive summary is simply a summary of investment you wish to make with help of hard money loan. Remember two words when doing it: short and details. A single paragraph of a few sentences can actually serve as a good summary. Do not burden hard money lenders by writing a novel. They d buy a book if y wanted long literature. Plus, think of it this way: If you had to read three stories in a day, in a few hours, which one will you read first, long, medium, or short one? 10

12 The executive summary must be filled with details despite its conciseness. Here are details that you must include in summary: Amount of loan needed Reason for borrowing money Timeline of investment The first two terms are well self-explanatory. If you are borrowing to build a building from an existing lot, timeline must include date or year you purchased property, how much you ve already invested in it, and when you plan to do next development on it. The or part of your executive summary is your exit strategy. This is method you willl use to get out of investment in case your initial plan does not work. For example, what would you do if house you rehabbed is not sold after sitting in market for a few months? If you don t have a clear exit strategy, make sure to discuss your options with experts or with more experienced investors. 4. Fill Out a Loan Application Next, secure an application form lender. Make sure you do not misss any relevant information. You can avoid 11

13 hassles like having to resubmit form by properly reviewing your application before giving it to lender. 5. Include a CMA and a Lot of Pictures A comparable markets analysis (CMA), or simply comps, is a good way to support ARV you established in your application. If you ve already performed your own comps on property you want to buy, send it to lender as well. Make sure it has lots of pictures of actual property, comparable properties, and neighborhood in general. Also, you may want to ask lender how he or she wants to receive information some prefer printed documents while ors prefer convenience of online media like s and photo- and video-sharing sites. 6. Submit a Contractor s Estimate If you re planning to rehab a property, and most likely you are, be sure to include a contractor s estimate. This document will support your estimate on repair expenses. The estimate, which should be easy to understand and in writing, will give lender an idea on why you need such amount for repairs. Also, ask your contractor to draw a timeline of repairs. 12

14 7. Back Up Your Bid Most traditional lenders like banks want to seee a good credit score when y evaluate borrowers. In case of hard money lenders, what is more important is prospective deal in hand. If deal is good and a potential money maker, n it will be approved. That doesn t mean though that you don t need to work on your creditworthiness. So, to back up your bid, provide lender with informationn on your assets to ensure that you appear more creditworthy. Real estate properties This is often knownn as cross-collateral. Simply put, it is real estate that has substantial equity. You may also include or assetss like boats and planes, again, as long as y have substantial equities. Cash This is one way of showing hard money lender that you actually know how to handle money. It also eases lender s worries of you ending in default in case some emergencies happen during course of your investment. He will be relieved to know that you have some money because that means you will be able to pay for holding costs, in case project goes beyond its specified timeline. 13

15 Experience A lot of borrowers are able to secure financing from lenders because of ir experience. They have been in business for years and y have made good money from it. For beginners though, you need not fret. You can still present or proofs of your creditworthiness if you don t have enough experience. Anor thing you can do is to partnerr with someone who has experience. Credit history Most banks and or traditional lending institutions base ir approval of loans on credit history; hard money lenders don t. That doesn t mean though that you won t be able to use a good credit history. If yours is good, flaunt it. That will give lender impression that you ve always been a good borrower. If it s not good, be sure to stress your strong points using or elements above. 8. Submit All Documents and Build Trust When you complete all needed papers, organize m and submit m to lender for evaluation. Instead of just hoping, you can still do something to get your loan approved. That thing is building trust. You build trust by chatting with lender. Talk about things or than your 14

16 loan. Talk about your plans after you complete project. Be sure to answer his calls or return m promptly in case you miss m. Check your regularly, especially if you indicated in application that he may contact you through thatt address. Prioritize submitting documents that he might ask for in middle of processing. Building trust is important not only for your current application, it is also a simple exercisee for long-term goals. If you are already trusted by lender, your application will be easier and even faster next time. It is likely that you won t provide proofs of your creditworthiness anymore because he already believes in your skill and experience. Why Use Hard Money Loans Hard money loans have distinct advantages over traditional loans that s why y are very popular among real estate investors today. In next portion of this guide, you will learn why you re better off using hard money loans for your real estate investments. You will be a CASH BUYER The most powerful part of hard money is that it allows you to offer all cash. With hard money loans, you can approach a home seller 15

17 and offer an all cash deal. This gives you a great advantage over or investors as sellers don t really care wheree you get money, as long as y get paid in full right away. Since you are a cash buyer, you have more chances of closing deals as you ll be treated as a serious buyer. When purchasing a bank owned home, for example, lender that owns property would prefer doing business with you since y d believe thatt you have necessary funds to close deal. The same is also true during foreclosure auctions, wherein banks prefer investors who are all cash buyers. You can Close Fast Anor important advantage of hard money is that it allows you to close a deal fast. You can secure a hard money loan in as little as 24 hours! Most traditional lenders take between 30 and 45 days to process a loan application. Hard money lenders, on or hand, can process a loan application faster. to two weeks. In general, hard money loan applications are approved within one 16

18 And since hard money loans will make you a cash buyer, you can immediately close a deal and move on to your next project. So if you re wholesaling, you can immediately flip house to an end-buyer and concentrate on your next deal. If you re a rehabber, you can immediately work on property, thus saving you time and money in process. Remember that home sellers prefer investors who can close deal fast. In fact, it is common knowledge in real estate industry that nearly all sellers want to close deal very quickly. Homeowners whose houses are under foreclosure, for example, want to sell ir properties as soon as possible and y are more likely to deal with investors who are cash buyers compared to those who rely on financing from a lender to close deal. They know that deals could fall through during long closing periods. Your Credit doesn t have to be Perfect A hard money lender will often review your credit history, but that doesn t mean that you need to have a perfect credit score to obtain a loan. Admittedly, times have changed since housing bubble burst. Nowadays, a 17

19 lot of lenders (but not all) will check your credit history. So if you have bankruptcies, liens, or collections, you need to provide necessary documents for those items if lender requires you to do so. The important thing to remember is that hard money lenders do not solely base ir decision on your credit history. So even if you have a challenging credit score, re is still a very good chance that you will get a loan. In fact, your credit report does not matter if you re in business of wholesaling houses. Your credit history will not be reviewed since you re only buying assignment contract, and not property itself. Lenders evaluate end-buyer s credit report and not wholesaler. Of course it does help if you have a good credit score. While hard money lenders do not exclusively rely on your credit report to approve your loan, having a good credit history would tell m that you are likely to repay loan, thus increasing your chances of securing loan. Lenders Look at Value of Property, not your Income The primary reason why your credit history is not decisive when borrowing hard money loans is because lenders base ir decisions on wher to approve loan on value of your property or your deal. Simply put, if lender believes that it will profit from your deal, it will lend you money. Lenders look at ARV of property, not your income, to qualify a loan. 18

20 A common misconception among real estate investors is that y need to have large incomes in order to secure loans from hard money lenders. This is absolutely untrue. The most important thing when borrowing loans from lenders is to bring great, profitable deals on table. You don t need to have a large income. In fact, you don t even need to have a job to secure a hard money loan. All you need is a great deal that would bring profits to both you and lender. As long as house qualifies for a loan, lender will provide you money to close deal. You can Borrow Purchase, Repair, and Closing Costs from Lenders Anor big advantage of hard money lenders is that y can lend you purchase, repair, and closing costs. As stated earlier, hard money lenders base amount y will release on price of property in good condition, or ARV. For example, a property that is perfect for rehabbing costs $100,000 in good condition. Traditional lenders such as banks will probably lend you amount neededd to purchase property. Hard money lenders, on or hand, can lend you up to $65,000, which is 65% of ARV. As stated earlier, lenders generally will loan 65% of ARV although occasionally, some lenders could lend you up to 70% of ARV. 19

21 So if you bought house for $40,000, spent $20,000 for repairs, and anor $5,000 for closing costs, you basically did not spend a single dime out of your pocket because your hard money loan covered purchase, repair, and closing costs. You can Negotiate with Hard Money Lenders A major reason why real estate investors prefer dealing with hard money lender is because of latter s flexibility. Hard money lenders create ir own rules, and as such, y can also change or bend m, depending on deal y are examining. Since y are more flexible, negotiating with hard money lenders is easier compared to traditional lenders such as banks, which often have panels or processing teams that handle real estate loans. Banks follow certain procedures and if you don t meet all ir requirements, you will never get that loan. On or hand, you can negotiate or haggle with hard money lenders. There is also less red tape when dealing with hard money lenders that s why loans in this type of financing are processed faster and easier. You can have multiple hard money loans Real estate investors prefer hard money loans becausee y can borrow from different sets of lenders at same 20

22 time. Hard money lenders do not report to credit agencies, which means that investors can have multiple loans with different lenders because ir debt-to-income ratio is never affected. This aspect of hard money lending is very beneficial to investors as it allows m to look for deals without having to worry about financing. Most people will probably get up to two mortgages from conventional lenders before y get overextended. And if you re overextended, you will not be able to secure conventional loans, which means that you can no longer do more deals. As mentioned earlier, your debt-to-income ratio will not be affected by hard money loans. This means that you can have as many deals as you want using this type of loan. Hard Money Loan Tips Tip #1: Don t Worry about Interest Rate Perhaps main drawback of hard money loans is ir perceived high interest rate. Normally, hard money lenders charge between 10% and 18% interest rates. At first glance, se rates seem absurdly high. But 21

23 when taken into context, you d realize that se rates are not really that high considering risks that lenders take. Remember that se lenders provide loans even to investors who don t have jobs. They are taking huge risks and a 12% or 16% interest rate sounds fair to all parties concerned. You should also consider that se rates are yearly rates. So at 12%, you re basically paying just 1% per month. Just think of hard money as quick and easy access to capital that would allow you to profit from a real estate project. Hard money loans also allow you to focus on most important aspect of real estate investing, which is finding great deals. Just think about it, how many offers could or would you make if you never had to worry about money? Tip #2: Get Pre-qualified Getting pre-qualified is one of best ways to make fast cash when investing in real estate. Getting pre-qualified simply means meeting with lenders and knowing what y are looking for. Determine what y are looking for and go find it for m. It would be way easier for you to close deals if you re pre-qualified as you can offer all cash to home sellers. Getting pre-qualified is best thing that you can do if you don t have a prospective deal. Instead of bringing a good deal to an investor, you ll do reverse: find out what properties y lend to and go find it for m. 22

24 So before you start making offers on houses, meet your local hard money lender and get pre-qualifiedyou can show to sellers that you have cash to buy ir properties. You can even ask for a proof of funds letter from lender so that Tip #3: Build Solid Relationships with Local Hard Money Lenders It is important that you build a good rapport with local hard money lenders. Lenders in your local market can provide you with valuable information and advice on your deals. In fact, most local lenders could just drive by a house and tell you wher you ve got a good or bad deal in your hands. Larger national companies take too much time to process a loan and y have less knowledge on your area compared to local lenders. You should also never limit yourself to just one lender. By creating solid relationships with several local lenders, you will have more options for loans in case one of lenders runs out of funds to finance your project. Hard money lenders are also great networkers as y are active players in your local real estate community, so you can benefit a lot from se lenders if you build long-term relationships with m. Tip #4: Determine Pre-payment Penalty When borrowing hard money, always ask lender what pre-payment 23

25 pre-payment or a certain number of months worth of interest. penalty is, if re is any. A pre-payment penalty is a provision in contract wherein a lender states that you have to pay a penalty if you pay off loan entirely. The penalty is usually expressed as a percentage of outstanding balance at time of For example, if you borrowed a six-month loan deal but you managed to rehab and sell house in three months, you re still required to pay three months interest. Not all hard money lenders require a pre-payment penalty but you should avoid loan deals that have this provision. Tip #5: Ask Questions Do not be afraid to ask your lender. Most hard money lenders will lend you as much as you want to borrow. If you want to maximize your chances, ask your lender outright. What makes a deal attractive? How do I make our deal more enticing to you? Get as much information as you can. You will only get honest answers if you ask your lender directly. 24

26 Tip #6: Get to Know your Lender Every hard money lender has his own sweet spot. If you do not want to end up wasting your time with a lender that may not be able to provide you favorable results, make a short list. First, collect names of lenders that appeal most to you. Second, get to know m better. Where do y live? In what locations do y conduct ir businesses? What kind of deals appeal to m? Do y favor residential over commercial properties or is it or way around? Tip #7: Do not Misrepresent your Property Value As we all know, hard money loans are money lenders will let collateral-based lending. Hard you borrow financing based on conservative values. This ensures security. Lenders will do everything in ir power to determine true value of your property. Tip #8: Your Credit Report Tells a Story It s not a secret that one of most common reasons why individuals opt for hard loans is due to a weak credit report. However, borrowers should realize that lenders will use your 25

27 credit score to understand your character and your repayment capability. It also tells a story about your individual disposition. Have you been divorced? Have you lost your job? Tip #9: Buy and Sell; don t Hold Studies have proven that since last year, among most successful and easiest exit strategies most investors use is a quick rehab of a property. Given present banking environment, getting refinancing on an investment property may be difficult. If you wish to buy, hold, and refinance for your exit strategy, lenders may view this move with great skepticism unless you have good credit and strong financials. Tip #10: Ensure that your Property is Competitive If you intend to rehab your property, you need to make it competitivee in such a way that outcome will have same standards as or properties in your neighborhood. An uncompetitive property may be difficult to sell. The longer you hold on to your house, more money you waste. Con duct a thorough research about neighborhood before taking any action. Tip #11: Build a Network Just like with any or business, good relationshipss are very 26

28 important in real estate investing. The secret to building a reliable network and generating huge profits is by acquiring long-term relationships. This does not only apply with hard money lenders but also with contractors, agents, fellow investors, etc. If you make a credible reputation in business and if you have successful people in your team, hard money lenders will find you. Tip #12: Know your Market This is important because knowing your market will increase your chances of earning profits that you can use to repay your loans. Let s say you used hard money to finance your rehabbing project. If you rely solely on money that you make after selling property, you have to ensure that your house sells fast. This can only be possible if your familiar with your market. Start with a thorough research or survey. You may drive around neighborhood and ask residents about type of properties that appeal to m. Find out about ir spending capability. How much are y willing to spend? What is ir source for financing? You may also ask help from your fellow property investors. Ask m about average time it takes before properties are closed. Determine what house features appeal to buyers. Tip #13: Get Started A lot of people are interested in real estate investing but y never got started because y think that y need tons of money to launch a career in this business. 27

29 They couldn t be more wrong. You now know that you don t need money to get started in investing in real estate, and best way to do that is to find local hard money lenders, find out what kind of properties y lend to, and go find that properties for m. Always remember that with help of hard money lenders, you don t need money to buy a house. Conclusion Hard money loans can do wonders for your real estate investing career. In fact, a lot of real estate investors credit part of ir success to hard money lenders. If you know how to effectively use hard money loans, you can not only jumpstart your career, but be successful as well. By following steps, tips, and or information provided in this handbook, you can have confidence to approach hard money lenders and bring m good deals. At a time when hard money seems to be king of real estate market, developing solid relationships with lenders could be fastest and easiest way for you to earn tons of cash investing in real estate. Remember, you don t need to have a job, you don t need to have a good credit report, and you don t need to have capital to do business with hard money lenders. So find a lender in your area today and invest your way to success using hard money loans. 28