I thought I'd post a recent hard money deal I completed, and dissect the elements for all those who might have questions about the ability of Hard Money Loans to accomplish your goals as an investor.
Two borrowers came to me with a duplex property in Chicago. They owned about 15 units total and have been renting exclusively to section 8 and housing voucher tenants. They were licensed contractors and had just started to get a head of steam rolling with their rehab business, when they hit a wall with this property.
They had purchased the duplex a few months earlier from a housing developer with government ties. It was purchased with a small cash downpayment and seller financing that would expire a few months after the rehab was to be completed, so as the buyer could get a conventional financing exit. The clients began work rehabbing the property using their own cash.
They immediately began running into problems with theft and vandalism and a month or two into the project they were already $20,000 over budget and way behind in schedule. A few short months later they had nearly run out of cash with the property only 80% renovated, and were facing a due date on the seller financing.
The borrowers were requesting $125,000 to payoff the existing seller financing and to complete rehab. I ran some initial numbers and looked into the property.
I arranged for the borrowers to meet with one of my lenders local to the property. He recognized the potential and the two of us did some more research and crunched some numbers. Comps told us the property would be worth around $275k when complete, and the borrower's rental numbers were below market rate, which made sense since his tenants were going to be low income. As it stood currently, we thought the property would be valued at $180,000. As we'd find out through a BPO, the property value came in closer to $163,500.
My lender made an offer to finance the property up to $106,000, which was 65% of the current value, and would allow the borrowers to payoff the seller financing and complete the job if they brought in a few thousand of their own money. If necessary, the borrower could even extend the private note a few more months to account for any unforeseen contingencies. They struck and agreement and we began working on third party docs.
That's when it got ugly.
The buyers had purchased the property under an installment contract with the seller financing and it was never actually deeded to them. Additionally, the city had recorded a few building violations against the property because it happened to be inspected just a day or two after a vandal had taken to it. There was also a water certificate that needed to be approved before certificate of occupancy could be issued. Finally, there was an unpaid judgment that needed to be cleared.
To clear these issues we had to request a few more documents to make sure my lender's position would be solidified, and the property could actually be rented as planned, or sold if necessary. As it stood, neither was possible.
We were in immediate contact with the original seller who furnished us with a payoff letter and agreed to deed the property to the buyer upon that payoff. That was a small victory. We also conferred with the borrower and the city to make sure the violations were amendable upon the completion of rehab and payment of back taxes. We got that in writing, amazingly. The only thing we couldn't clear was the judgment, which we ended up paying at loan close from the proceeds of the new loan.
From start to finish, the deal took about 14 days, and that included a 3 day delay with the check coming from the lender's two IRA's, which were splitting the loan. The lender's attorney was instrumental in making sure the documents were legal and all the lender's bases were covered.
The borrowers were able to get their project back on track spending only the original money they had planned to spend. Overall, the deal was done at 65% LTV, but that money represented 84% of the borrower's total cost in the project.
Needless to say, a deal like this would never have been completed through the banks, despite the fact both borrowers had credit scores in the mid-high 700's. There were too many legal hurdles and moving parts through which this deal would have fallen apart 10 times at a bank - and there's no way it would've been done in the time we got it done.
The author has permitted the reprinting and redistribution of this article.