Hard Money is called that for a reason. It may be easy to borrow, but it is hard to pay back. I hear “speakers” talk about borrowing Private or Hard Money to finance a deal and not to worry because “the property stands for the debt”. What the speaker is implying is that there is no personal liability associated with the loan. This is a DANGEROUS MISCONCEPTION.
I recently hosted a panel of Hard Money Lenders for my local investment group. One Panelist (they were all Private Lenders using their own and/or partners money) indicated that the borrower must agree to be personally liable for the loan. A member of the audience asked if they would take a Deed in Lieu of Foreclosure in the event the borrower was unable to complete the rehab on a property financed with Hard Money. The response was a resounding “NO”. The lenders said that they did not want to OWN the property, they just wanted to be PAID. They might agree to some type of workout but they were looking for people who could perform.
When an individual borrows on real estate property he signs a Note (which is basically a type of IOU) and a Deed to Secure Debt, or Mortgage (a collateral agreement which gives the lender the right to take the property if the borrower defaults on payment). The lender may seize the Collateral through Foreclosure, or he may go after other assets of the borrower, i.e. “Sue on the Note”. A lender who “Sues on the Note” may get a Judgment, which allows him to garnishee wages, take money out of a bank account, or seize other assets. There are legal processes that must be followed, but the bottom line is the lender has a very big stick.
Lenders are not generally inclined to have the borrower surrender the property. There may be Liens and Judgments against the property and/or the borrower as well as Materialman’s or Mechanic’s Liens against the property. There may be IRS Liens etc affecting the property. Some of these may not show up in a title search and could come back to haunt the lender if he voluntarily accepts the property. A Foreclosure on the other hand will “clean out” most of the potential title issues.
In general, the Hard Money/Private Lenders on the panel all said they were looking for borrowers who could PERFORM. They were looking to establish relationships for repeat business. These folks loan the funds to acquire and rehab or build new primarily single-family houses in their own market areas. Some have more stringent geographic restrictions than others.
In general, lenders base the interest rate and loan amount to the Value Ratio on the particulars of the individual deal, with interest rates currently in the 12-14% range and 3 to 5 discount points for seasoned borrowers.
Inexperienced borrowers will possibly pay more. The lenders generally will expect at minimum, monthly payments of “Interest Only” and will expect the loan to be repaid in 3 months to 2 years. Generally, a lender will allow several Extensions of 1 to 2 months and will charge 1 to 2% for each month’s Extension. At some point there will be no more Extensions and the loan will be called due. It is better to negotiate Extensions up front when you are applying for the loan. Loan-to-Value Ratios are generally in the 50 to 65 % range with ratios going as high as 70% on better properties in better neighborhoods. The lender will factor the experience level and the size of the project into the equation. Several panelists indicated that if the property and the deal were good enough they would be more lenient on the borrowers qualifications. Some lenders do their own appraisals and inspections and others use outside inspectors and inspectors. The Lender will generally have established relationships with these folks and may require the borrower to pay for these services up front.
This panelist, as with other hard moneylenders, does not loan to homeowners and they all are making what are called “Short Term Bridge Loans.” These are in the category of “Commercial Loans”, and are not regulated in the same manner as Residential Mortgages. These loans are not intended to be used for consumer purposes.
Experienced investors use Hard Money/Private Lenders to fund acquisition and rehab projects because the process is quick. Generally the lender can close within 1 to 2 weeks assuming that the title is OK and the appraisal can be done quickly. Private/Hard Money Lenders may also make very Short Term Loans in the following situations: where an investor is Closing on a property and then Reselling, or where the property is Under Contract to sell and a “Simultaneous Closing” or “Assignment of Contract” is not feasible.
These loans are generally made to experienced borrowers who have an established relationship with the lender. By using borrowed funds, investors preserve their own funds to keep sufficient Reserves on hand. It is much more difficult and expensive to obtain funds when you are part way through a project and have run out of money. By utilizing borrowed funds it is possible to do more expensive projects or to do a larger volume.
An experienced Hard Money Lender is a good “deal barometer” in that the good ones are in the streets daily and can quickly analyze a deal. If the lender doesn’t like the deal you should look more closely. Ask him why. He may be currently short of funds to loan, or he may simply not like the deal.
Hard Money is a tool. It has its place in the investment world. It is like a sharp ax. Used properly it can be efficient. Used improperly it can cause serious and/or fatal consequences.
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excellent informative post.
I couldn't agree more, we hard money lenders are like a good partner guiding and helping if needed to ensure we don't have to step in an finish a project, that's not what anyone wants.
Good post, although a little too broad of a stroke. I've got lenders that will loan to entities with no personal guarantee. Not for first timers, but experienced guys can pay a point more and borrow solely in an LLC.
Also plenty of commercial loans that don't require personal guarantees.
I don't know about every state, but here in Georgia there's a pretty small window to make a claim against a guarantor, anyway. I had personal guarantees on a lot of stuff when I crashed and burned in 2007 and never heard from the bank. Not that I had much to take at the time, anyway.
A lot of that will depend on institutional money vs. Private money on how the HML is funding his business.
Saying that, most lenders aren't in the rehab business and don't want the house/project (although some do, especially in commercial). And you really don't want to be borrowing without adequate resources in the first place. I'm $12k past funding on one job, $7k on another as I type this. This stuff rarely goes according to plan, you need to plan accordingly.
@Bret Doman , if you're in Atlanta I'd love to buy you a beer and talk some shop sometime...
A lot of banks elected not to chase personal guarantors for various reasons after the crash, but that small window is actually pretty wide - the statute of limitations is 20 years in GA if the borrower signs the note/guaranty "under seal," which almost everyone does, or 6 years if not.
I finance my flips with a hard money lender that specializes in the rehab fix and flip space exclusively. We both are in California and they are a true no recourse lender. I have completed only 2 deals with them and had a track record of flips before starting with them.
I would never stick my lender with a bad deal. I may be nieive about this but I just would never let them loose.
In the last few deals I have done all with hard money lenders I have made a good profit on these home something I could have never done with out them.
By the way I'm one of the inexperienced investors you seek of. I pay an 8% flat fee on my loan amount. The amount is figured at 80% ARV and accounts for all of the fix up cash plus the purchase price. The best part is no payments for 105 days "and yes I know I'm prepaying the payment"
So to close I love hard money lenders....... all in cash is only 8% of purchase plus fix up. I love my lender...... and the no recorse aspect is just one my reason to smile
call me and I will give the name of the lender in Riverside CA that I'm speaking about.
interesting. Flat 8%? 6 mos term I'm guessing?
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