Hard money loans are easily accessed and cut through the red tape. If you can develop a relationship with a LOCAL hard money lender, you can get funds within a couple days, and sometimes with no appraisal or other costs (except for origination fees of course).
Now different HML's have different requirements and protocol. There is a local HML that only charges 12% interest and 1 point origination if you keep it over a year and 2 more points if you keep it less than a year. He only does 30 year notes, and obviously he wants you to keep it. He has over 1100 notes, so he doesn't want the hassle. He wants his money to stay loaned out. I have also worked with another local HML who doesn't charge any points, but he's extremely fical and can be hard to work with.
Now the typical HML will charge somewhere right around the usuary rate. In Texas its 18% annual, so most HML's will charge 5% origination and 13% interest on a 1 year note or no points upfront and 18% interest with a shorter call. Now they can get around usuary by shifting their origination fee into a commitment fee (little different protocol), but most HML's don't know this.
The beauty of HML's is that the loan is normally not based on your credit score (especially with local lenders) or atleast not on your credit worthiness (assets and income), you can receive funding within a matter of days (normally about 7-14 days) rather than 30 days+, and you can get a loan on any piece of junk that you find. You also are not normally dealing with a processing team. You deal directly with an individual lender. If he or she says yes, then you have the loan. This is quite advantageous versus going through an entire loan committee process or underwriting process.
HML's on longer term investments are not a good idea, but for short term flips, rehabs, or for the initial purchase, they can be a very strong tool. I started my investing using HML's, and have made very good money using them. I now use mostly a line of credit from the bank, but it took me several years to work into that. I also now do some local hard money loans to other investors.
Hard Money is a loan that is based on the property you
are buying, and not on your credit score.
It costs twice what a regular mortgage does plus
about 4 percent as an origination fee.
Developers and flippers use it to fund their deals
so that they can have more than one or two deals
working at a time.
Hard money lenders tend to be private individuals (or small groups). Most of the hard money lenders I have talked to lend for the short term only, almost always for less than a year and usually only for 1-3 months.
Pros: As was mentioned, a hard money lender does not generally look at your credit score. You might be able to borrow 100% of your purchase price.
Cons: You pay a ton in interest. For example, recently a hard money lender approached some investors we work with. They wanted a 10% return, due at the end of three months. They quite often want the loan secured by real assets, your car or house or whatever.
If you know you can buy a property and turn it quickly at huge profit, and you can't get a standard mortgage, it might be one way to go. Some investors use hard money to get into the property, do some quick fixes to raise the property value, then get a new loan (based on the property's new, improved value) from a bank to pay off the hard money lender.
Hard money loans are easily accessed and cut through the red tape. If you can develop a relationship with a LOCAL hard money lender, you can get funds within a couple days, and sometimes with no appraisal or other costs (except for origination fees of course).
Now different HML's have different requirements and protocol. There is a local HML that only charges 12% interest and 1 point origination if you keep it over a year and 2 more points if you keep it less than a year. He only does 30 year notes, and obviously he wants you to keep it. He has over 1100 notes, so he doesn't want the hassle. He wants his money to stay loaned out. I have also worked with another local HML who doesn't charge any points, but he's extremely fical and can be hard to work with.
Now the typical HML will charge somewhere right around the usuary rate. In Texas its 18% annual, so most HML's will charge 5% origination and 13% interest on a 1 year note or no points upfront and 18% interest with a shorter call. Now they can get around usuary by shifting their origination fee into a commitment fee (little different protocol), but most HML's don't know this.
The beauty of HML's is that the loan is normally not based on your credit score (especially with local lenders) or atleast not on your credit worthiness (assets and income), you can receive funding within a matter of days (normally about 7-14 days) rather than 30 days+, and you can get a loan on any piece of junk that you find. You also are not normally dealing with a processing team. You deal directly with an individual lender. If he or she says yes, then you have the loan. This is quite advantageous versus going through an entire loan committee process or underwriting process.
HML's on longer term investments are not a good idea, but for short term flips, rehabs, or for the initial purchase, they can be a very strong tool. I started my investing using HML's, and have made very good money using them. I now use mostly a line of credit from the bank, but it took me several years to work into that. I also now do some local hard money loans to other investors.
I appreciate your comments, Jim, and I'm glad I could help. I don't personally know of any HML's in Dallas, but I have come across some very good contacts there.
Check out houseflipper.com. She is an investor that runs an investor education/networking club there. I know she has some HML contacts on her website. Her club I think is dfwrein.com. Her company seems to offer some very good contacts/knowledge for a very reasonable price.
You might check out myhousedeals.com. I know they have a DFW outfit, and from what I've seen they have a pretty good concept. They offer all kinds of contacts and local deals.
I am a hard money lender and I want to help educate a few on where hard money fits in.
Notice the discussions on wholesale deals. Ryan and others will talk about how you can not easily get a deal with an assignment or other fee funded using a traditional lender for a retail buyer. When wholesaling you mostly have to sell to investors who have the cash or know how to get it.
Hard money lenders do not care as much about creative techniques. They do not ask about seasoning of the title. HML fund investors and they do not ask the questions a conventional lender will ask.
Second point.
Major refurbishment deals are also hard to fund. If there is no functional toilet or kitchen then the property can not be occupied. Many lenders will not lend in such a situation. Construction financing can work if you work with a local bank. Or hard money if you do not have the time to establish yourself with a local bank. More likely when you do not have the credit.
Third point.
There there is the mantra that if you find a great deal but lack the money find a partner to put up the money. With a hard money lender you get a partner who does not care about the paint color, the rugs, if you redo the roof and the other decisions. You pay them as agreed and they could generally care less what you do with the project. Or you get a money partner who wants to be on title, they want a say in what you do, they get skittish when the deal hits a speed bump, they think they know how to invest in RE even if they never have done a deal before.
Finally there is the math.
If you can not fund a deal and are thinking about getting a partner on a 50/50 split consider hard money. Run the numbers and see what they are telling you. If the deal really is a winner then 50% of the profit is going to cost you more of your deal than a hard money lender will want. 50% of the profit is a big chunk compared to hard money for a few months even with 5 points up front. Most deals that I have seen were better with HM terms (5 points, 15% interest over 12 months) compared to 50% of the profit. The two are close but the HM comes in lower over the period. The shorter the project the better the HM is given that the HM points vs. 50% profit splits are both front loaded.
Conclusions?
Hard money is not for everyone and definitely not for every deal. If hard money is more expensive than taking on a partner that is normally a warning sign the deal it way too thin.
Warning: I am not looking for new customer. Frankly I would likely turn you down right now as I have some other things I am focused on.
Hard money is 1 tool in your RE investment toolbox. You really should have multiple tools that you can use when needed. HM is a bridge solution in most cases between the purchase and when you can get conventional financing (or sell). Learn what tool is best for each task. Hammers do not work well with screws. Hard money does not work well with many situations.
Tangent: Ever hear the formulas that talk about never paying more than 70% of the ARV minus all costs, etc.? The reason that the number is 70% (or less) is because you want to be able to flip or otherwise sell to someone who might be using hard money. If you comfortably stay below the limits for hard money you pretty much know you can always get a deal funded independent of condition and credit. You can make cash offers as you know where to find the cash on short notice.
Having multiple exits is critical and hard money can provide 1 exit for a deal.
It is all about the numbers. When you have a deep track record of past deals and cash banks will lend using working lines of credit. WLOCs are clearly less expensive than hard money. Until then HM used wisely is a bridge to the future.
John Corey
One of the best ways to find a hard money lender is to check locally. Attend the REIA meetings in the area. Chicago is a big place. I am sure there will be some hard money lenders in the city or surrounding area. There likely is more than one REIA meeting.
John Corey
@Ryan Webber this is a very old post but thanks for this explanation. I was able to learn a lot from this post. Do you by any chance have examples you would share? Example your first deal, bad deal, what to beware of? I also see you are a Specialist in wholesaling I am looking to start through wholesale, seller finance, or flip with hard money. Soaking up knowledge to narrow down my starting point.