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Pricing on Hard Money Loans Varies Widely Among U.S. States

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Corey Dutton

Real Estate Lender from Salt Lake City, Utah

Feb 20 '13, 11:24 AM


Why do the interest rates charged on hard money loans vary so greatly from one State to another? Borrowers ask me this question all the time. For example, in California rates charged on hard money loans start as low as 9%, versus rates starting at 14% in New Jersey. But why such a wide difference in interest rates charged between these two States?

Unlike mortgage interest rates that are governed by specific factors, interest rates in private money are largely influenced by supply and demand as well as other unique factors. One of the biggest factors is related to “the going rate on the street,” which is the interest rates that other hard money lenders are charging in that particular City or State. This is likely the best reason for why hard money interest rates on the East Coast are so much higher than interest rates charged on the West Coast.

Because this is an active discussion, please share your thoughts on this topic. We would like to hear from you!



Ann Bellamy Verified

Real Estate Lender from Tyngsboro, Massachusetts

Feb 20 '13, 11:34 AM
4 votes


Supply and demand for sure. Lots of money chasing deals drives the rates down. Lots of deals looking for money drives the rates up.

Capitalism at work.



Medium_small_logoAnn Bellamy, Buy Now, LLC
Telephone: 800-418-0081
Website: http://www.buynowhardmoney.com
Hard money lending in NH and MA, and for free networking in MA, http://www.BlackDiamondREI.com


Travis Daggett Verified

Real Estate Investor from Eugene, Oregon

Feb 20 '13, 12:49 PM


Absolutely right! Great to see a market less manipulated, where the rate actually tells us something!



Medium_818logodarkblue2Travis Daggett, 818 Investments
E-Mail: [email protected]
Telephone: (541) 632-4351
Website: http://818InvestmentsLLC.com


John Thedford

Real Estate Investor from Naples, Florida

Feb 20 '13, 01:31 PM


Interesting! I was not aware of the great differences in rates across the country. I am in Naples, Florida. We see rates from 8% all the way up. I believe you might see differences due to the lenders amount of capitol to invest. I know of one lender charging below 8% (that as a BIG surprise). I believe he charges so little is due to his amount of cash he has to lend out and that fact that putting it in a bank in a CD is almost useless. His loans are variable rate determined by the feds stated rate of inflation. If we get huge inflation in the next 2-3 years his rates will rise. He has a lot of cash (a former banker) and doesn't like it just sitting in a savings or CD. I know of lenders on the west coast that are greatly satisfied with 10%. I suspect that lenders in NY and NJ are setting rates after looking at their costs of living in those states, state income taxes, etc. Private lenders are in it for the largest amount of profit they can make. They might tell one borrower 12% and tell a different borrower 14% if they believe borrower #2 will pay that rate. I have quoted some rates and people say "thanks" and hang up. I have had "captive" borrowers that wanted money FAST and they were willing to pay a lot simply because they can get it, they might not have a lot of time to shop around, and...it meets their needs.

John Thedford
Naples, Florida
BTW...my RE agent just told me the IRS charges 23.98% interest on back taxes due!



Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Feb 20 '13, 01:47 PM


@John Thedford,

Actually I'd rather owe the IRS than owe on a credit card. http://www.irs.gov/uac/Newsroom/Interest-Rates-Remain-the-Same-for-the-First-Quarter-of-2013

Where they get you is the penalties!

-Steven



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Mike H.

Real Estate Investor from Manteno, Illinois

Feb 20 '13, 02:24 PM


I think the rates have more to do with the default rates in the individual states. The lower the default rates, the higher the number of lenders you have and the lower the rates they can offer.



Don Konipol

Hard Money Lender from Houston, Texas

Feb 20 '13, 02:43 PM
1 vote


1. Different risk factors. Some hard money lenders lend soft - hard money, use credit scores, cash flow coverage, etc. Others (so as myself), are true hard money lenders, the asset alone is the basis of the credit decision. The more risky the loan, the higher the rate.

2. Availability of money vs. demand for money at any given time in any given area.

3. Types of property financed, i.e. higher fees on single use commercial than on residential.

4. Ease of foreclosing - much longer foreclosure process in judicial foreclosure states than non judicial foreclosure states.

5. Outlook for real estate prices - lending get easier and cheaper if prices are increases as increasing prices cover many lending errors.



John Thedford

Real Estate Investor from Naples, Florida

Feb 20 '13, 04:04 PM


Originally posted by Steven Hamilton II:
John Thedford,

Actually I'd rather owe the IRS than owe on a credit card. http://www.irs.gov/uac/Newsroom/Interest-Rates-Remain-the-Same-for-the-First-Quarter-of-2013

Where they get you is the penalties!

-Steven

No doubt my friend! Fortunately, I don't owe either. Discover used to have me by the you know what a few years ago. I asked them to lower my interest rate and they refused. After I got them paid off, I promised never to carry a balance again. Now, I am set up for auto pay, and will never willingly carry a credit card balance!

Thanks!
John Thedford
Naples, FL



Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Feb 20 '13, 04:08 PM


@John Thedford,

I hate paying interest. One of the smartest things I ever did was get all of my bills autopaid through my credit card with no less than 2% cash back. I cut ALL of my bills by 2%. :)

-Steven



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


John Thedford

Real Estate Investor from Naples, Florida

Feb 20 '13, 04:18 PM


WOW...2% cash back is awesome. Imagine paying a monthly mortgage payment with 2% cash back! Do you know or think those 2% cash back offers are out there today or is this a card you have had for some time.

John Thedford
Naples, Florida



Jeff S

Private Money Lender from Los Angeles, California

Feb 20 '13, 04:38 PM
1 vote


It’s not just supply and demand or perceived risk. Within each market, inefficiencies drive rates as well.

How many posters to this board have written about the private lenders they are able to borrow from at below market rates? Similarly, how many posts do we read desperately asking how to find private and hard money lenders?

If it were easy for borrowers to find lenders, and vice versa, rates would be much lower and more consistent.



Karen Margrave Moderator

Developer from Orange County, California

Feb 20 '13, 04:49 PM
1 vote


@Jeff S @Ann Bellamy @Corey Dutton @Don Konipol Between all of you, you cover a wide swath of the country, so do tell, is money available for loans in your area? What is the typical points and interest charged for deals. Are your loans based on the deal or the buyers credit, etc?

I know this is by far one of the most asked about subjects on BP, and hopefully @Joshua Dorkin will be doing a Podcast on it in the future!



Karen Margrave, Parlay Investments, 1st American Construction
E-Mail: [email protected]
Telephone: 949-933-3955
Website: http://www.themargravegroup.com
PARLAY: definition: to increase or otherwise transform into something of much greater value


Jenkins Ramon Donor

Real Estate Investor from Milwaukee County, Wisconsin

Feb 20 '13, 06:22 PM


Not sure how true this is
and also I’m not expert in this topic ( disclaimer )
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Short story , I was at local REI meeting earlier today
Conversation was regarding private money

It was discussed that individuals our getting
private funds ( 6 – 8% ) then taking those funds
and offering separate loans to another investors
as a hard money rates (14 above % )

Pocketing the differences on positive transactions

Important – I know there laws about distribution
private and hard money loans

Here how I visualize individuals our performing this type of funding:

Sub1 – person who offering original private money ( IRA / etc )

Sub2 - let name Johhy B Nasty ( middle guy )

Sub3 – person looking for funds , but have no credit / exper. / etc

Possible transaction :
==============================================
Sub2 - borrow money from Sub1 at 7% for 9 months
Sub2 - borrow new obtained funds to Sub3 at 14% for 7 months

Sub3 - completes rehab, market property, &sell to new home owner

Sub3 - pays back Sub2 original loan amount + interest used
( 14 % + rate )

Sub2 - immediately pays back Sub1 + interest used ( 7% rate )

Sub2 - made interest off of Sub3 rehab deal basically
( the interest rate difference )

Everyone happy -> sub1 , sub 2, and sub 3

Again~I know their laws & licensing for offering private/hard funds



Ann Bellamy Verified

Real Estate Lender from Tyngsboro, Massachusetts

Feb 21 '13, 06:00 AM


@Karen Margrave, rates and terms vary widely by deal and by underwriting criteria. Even in the relatively small geography in which I work. Some local lenders require credit reports and DTI's. Most don't. Rates range from 18% and 10 points (from a guy who lends on the deals that no one else will do) to 10% and 1. 10 and 1 is a private guy who has a small amount of money and only lends to people he knows, but promotes himself as a hard money lender. In the middle, rates range from 12-14% interest and 2-4 points.

And from lenders in that mid range, rates can vary by deal, based on perceived risk. Risk is higher in "bad" towns vs "good" towns. Skin in the game changes the perceived risk. Distance from the lender's center of operations changes the risk - to that lender. Past history with the borrower influences rates. I can't even quote you a firm rate from my company, because we are going to look at a deal in Brockton MA with a brand new investor very differently from a deal in Milton MA with an experienced investor. Both are towns not far from Boston, and within 15 miles of each other. But the two are very different.

And while you didn't ask, it has been commented that lenders quote as high as they think they can get away with. In some cases that is probably true. Lending is a for-profit enterprise. I don't advocate trying to take advantage of someone that way. But that's not much different from most of the real estate investors that lenders work with. I don't think I know of any rehabbers who would say: "No I don't want to make that much on this deal, Mr. Seller, please let me pay you more for your house than you asked for."



Medium_small_logoAnn Bellamy, Buy Now, LLC
Telephone: 800-418-0081
Website: http://www.buynowhardmoney.com
Hard money lending in NH and MA, and for free networking in MA, http://www.BlackDiamondREI.com


Rick Bradd

SFR Investor from Pt Hueneme, California

Feb 21 '13, 06:29 AM


Originally posted by Jenkins Ramon:
Not sure how true this is
and also I’m not expert in this topic ( disclaimer )
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Here how I visualize individuals our performing this type of funding:

Sub1 – person who offering original private money ( IRA / etc )

Sub2 - let name Johhy B Nasty ( middle guy )

Sub3 – person looking for funds , but have no credit / exper. / etc

Possible transaction :
==============================================
Sub2 - borrow money from Sub1 at 7% for 9 months
Sub2 - borrow new obtained funds to Sub3 at 14% for 7 months

Sub3 - completes rehab, market property, &sell to new home owner

Sub3 - pays back Sub2 original loan amount + interest used
( 14 % + rate )

Sub2 - immediately pays back Sub1 + interest used ( 7% rate )

Sub2 - made interest off of Sub3 rehab deal basically
( the interest rate difference )

Everyone happy -> sub1 , sub 2, and sub 3

Again~I know their laws & licensing for offering private/hard funds

I would doubt that would work very well, it would be an unsecured loan with no safe exit strategy. Due diligence by the original lender would have to be non existent, maybe a lender who was family and trusted you would loan on blind faith, but I never would.

Just my opinion.
Rick



Jenkins Ramon Donor

Real Estate Investor from Milwaukee County, Wisconsin

Feb 21 '13, 07:26 AM


@Rick Bradd , I agree

I was surprised to hear a few local REI members was
performing these type of transactions



Karen Margrave Moderator

Developer from Orange County, California

Feb 21 '13, 07:34 AM


@Ann Bellamy Thank you for your reply. I always like to get answers from real life 'experts' in the field, that actually work in the business related to the questions. I know there are many people that set themselves out as 'lenders' 'hard money lenders' 'private lenders' etc., when in fact they aren't. BP members trying to find answers need real information from reliable sources that actually make loans, so that they can make informed decisions on their investment strategy, and whether or not it is viable, etc., and you are a great source.

The fact you put your rates etc. out for everyone to see is a testament to your integrity Ann. I know many people don't understand that just because someone is a hard money lender, that the deal still has to make sense, and if they lack skin in the game, they need experience, or credit scores... etc., and the rates charged are relative to the risk taken.

Hard money plays an integral part in the business of real estate, and it's good for BP members to be able to understand it, and the value it has in certain circumstances.



Karen Margrave, Parlay Investments, 1st American Construction
E-Mail: [email protected]
Telephone: 949-933-3955
Website: http://www.themargravegroup.com
PARLAY: definition: to increase or otherwise transform into something of much greater value


Sabrina Laplante

Real Estate Investor from Squaw Valley, California

Feb 21 '13, 10:59 AM


I enjoyed reading this post greatly. Right before I headed out the door this morning, my dad popped off with "Have you done anymore research on hard money lenders for AZ?" As dumb as this sounds, it is confusing. I know points are the same as 1%, but then there is all the other fees on top of that stuff. I am trying to research hard money lenders in the Phoenix area, and it seems as the the rate I am coming up with from a couple different sites are 16.99%. Would love to hear a podcast on this subject.



Justin S. Donor

Real Estate Investor from Chandler, Arizona

Feb 21 '13, 11:25 AM
1 vote


@Sabrina Laplante

Most licensed HML in AZ are in the 16-18% range with a $900 loan origination fee. If you go private you can get better rates and terms but they are much harder to find.



Medium_rezamp_buscard_whiteJustin S., Rezamp, LLC
E-Mail: [email protected]
Telephone: 4806780446
Website: http://ReZamp.com
Powerful software that discovers real estate deals for you 24 hours a day, 7 days a week.


Karen Margrave Moderator

Developer from Orange County, California

Feb 21 '13, 11:38 AM
1 vote


@Sabrina Laplante I think that @Joshua Dorkin and @Brad Turner are going to be doing a Podcast on Private and Hard Money Lenders, not sure when though. I know it's one of the most popular subjects! Who knows, maybe that will be their next E Book ;)



Karen Margrave, Parlay Investments, 1st American Construction
E-Mail: [email protected]
Telephone: 949-933-3955
Website: http://www.themargravegroup.com
PARLAY: definition: to increase or otherwise transform into something of much greater value


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