Questions about the Hard Money Process

27 Replies

Hello BP, 

I was hoping someone could give me clarification on how using hard money works. I've never flipped a property before but thats what I'm looking to do. I want to get my financing in order first and hard money is looking like the best option for me so far. 

Do I need to line up a hard money lender before I have a deal in place or do I need to present a deal to a hard money lender initially for consideration? 

In either situation, what kind of verbage and documentation should I be using with the seller? I will be targeting distressed single family homeowners via direct mail. 

Can someone please walk me through what this process looks like? 

Thanks in advance. BP has been a great resource for me and I look forward to the day that I can give back as well!

Every deal will be slightly different depending on risk/reward and overall relationship with your lender. My last client used hard money and it looked something like this

Client decided to make an offer and offer was accepted/ it was stated in the contract that he would be using a hard money loan.

Hard money lender lended him 85% of the purchase price for 6 months.. for this they charged 2 points "2%" of the loan amount. after 60 days they would start charging additional interest on the money still owed"something like .33 or .5 percent every month" With no prepayment penalty

In addition to the purchase price they loaned him 100% of the funds needed to fix up the property up at 11% interest

I may have left out some of the finer details but this was his loan in a nutshell.

Originally posted by @Dustin Frank :

Every deal will be slightly different depending on risk/reward and overall relationship with your lender. My last client used hard money and it looked something like this

Client decided to make an offer and offer was accepted/ it was stated in the contract that he would be using a hard money loan.

Hard money lender lended him 85% of the purchase price for 6 months.. for this they charged 2 points "2%" of the loan amount. after 60 days they would start charging additional interest on the money still owed"something like .33 or .5 percent every month" With no prepayment penalty

In addition to the purchase price they loaned him 100% of the funds needed to fix up the property up at 11% interest

I may have left out some of the finer details but this was his loan in a nutshell.

Thanks for the details, Dustin. So there is a specific hard money type of contract that is used with the seller. Is this something I would obtain from the hard money lender or would this be done through a realtor?

This post has been removed.

"Thanks for the details, Dustin. So there is a specific hard money type of contract that is used with the seller. Is this something I would obtain from the hard money lender or would this be done through a realtor?".......

In Colorado there is A section of the contract where you check mark where your money is coming from... instead of selecting FHA, VA, Conventional etc. You select the box that says "other" and then write "hard money loan"......A real estate agent should be able to do all of it for you.

Originally posted by @Hunter Perkinson :

Thanks for the details, Dustin. So there is a specific hard money type of contract that is used with the seller. Is this something I would obtain from the hard money lender or would this be done through a realtor?

 No specific contract is needed.  When they ask how you are planning to purchase the property, just check the box that says "Cash."  Hard money is as good as cash.

A hard money loan is not cash.  If you're using hard money, do not claim you're paying cash.  That will leave you with no financing contingency and you'll lose your earnest money if the lender won't fund the deal.  Hard money is absolutely NOT as good as cash.

First, realize that details can vary quite a bit among lenders.  I'll describe what I've been through, as both a borrower and lender.

You do want to find a lender before you make offers. You'll need to get pre-approved. Its not all that different than a conventional loan. You'll include the pre-approval letter with the offer. You may need to include an explanation about the lender. Once you have an accepted offer, the lender will do an appraisal. Provided that's OK, the closing will be largely like a conventional loan. Once difference is that most or all of the rehab budget will be held by the HML. They will give you "draws" as the work is done an inspected.

Suggest you deal with your local or city where you want to flip. We do not process those internet based company approval letters. 

Unless you have proof of funds(for downpayment), credit rpts. business references, track records(not mandatory), and a hardmoney lender letter with interest rate and your money ready, most sellers will not even think much of your request.

I suggest you hire a realtor to follow up as letters are mostly not even opened. You are just wasting your postage money. 

Originally posted by @Jon Holdman :

A hard money loan is not cash.  If you're using hard money, do not claim you're paying cash.  That will leave you with no financing contingency and you'll lose your earnest money if the lender won't fund the deal.  Hard money is absolutely NOT as good as cash.

First, realize that details can vary quite a bit among lenders.  I'll describe what I've been through, as both a borrower and lender.

You do want to find a lender before you make offers. You'll need to get pre-approved. Its not all that different than a conventional loan. You'll include the pre-approval letter with the offer. You may need to include an explanation about the lender. Once you have an accepted offer, the lender will do an appraisal. Provided that's OK, the closing will be largely like a conventional loan. Once difference is that most or all of the rehab budget will be held by the HML. They will give you "draws" as the work is done an inspected.

I have to disagree with a few points here, but your post did make me realize that my post wasn't complete enough, so I do apologize for not providing value.  I was focusing more on answering @Hunter Perkinson 's immediate question (before my post) than his initial post.

When investors advertise, "We buy houses in cash", the majority of the time that isn't cash; it's hard money.  Usually, when you make an offer with hard money, you don't have a financing contingency.  So it's as good as cash, or at least, that's the offer you're making to the seller.  Actually, anything's as good as cash in the seller's eyes at closing because, in the end, they'll get their money.

Jon's right that you should get a pre-approval and discuss terms with the lenders first.  Some hard money lenders won't give you one though until you have a property in mind (doesn't necessarily have to be under contract).

The comparison to a conventional loan is something else I disagree with. It should be much faster and easier to get hard money than conventional. Conventional usually goes along with the financing contingency, whereas hard money usually doesn't.  The speed of the transaction will be faster with hard money. Documents at closing should be a lot less than with a conventional loan as well.

When I make offers in my market, only 10% of the time does a seller actually ask for Proof of Funds or a pre-approval.  But you should always be prepared to give it.  HMLs don't always do appraisals; sometimes it's a BPO (faster and cheaper).  If they're local to the market, a lot of them do in-house comps; these are the lenders that can close in under a week.

At the same time, I could be wrong because I do come from west coast markets where even conventional buyers waive the financing contingency.  I actually have never heard of anyone using the financing contingency with hard money.  But I suppose that can be done.  Usually, the inspection contingency is the only thing you need, and you should never waive that (unless you know exactly what you're doing).

@Nghi Le I'm relating my experience, which is apparently quite different than yours.

Regarding this:

When investors advertise, "We buy houses in cash", the majority of the time that isn't cash; it's hard money. 

I'd say that in many cases the people placing those ads have no intention of buying at all, let alone with cash.  They're wholesalers.

Originally posted by @Nghi Le :
Originally posted by @Hunter Perkinson:

Thanks for the details, Dustin. So there is a specific hard money type of contract that is used with the seller. Is this something I would obtain from the hard money lender or would this be done through a realtor?

 No specific contract is needed.  When they ask how you are planning to purchase the property, just check the box that says "Cash."  Hard money is as good as cash.

Thank you!

Updated 7 months ago

For the updated post as well!

@Hunter Perkinson

Hard money isn’t as good as cash. It still has to go through an underwriting process and is subject to contingencies and can potentially be turned down if the lender doesn’t like the numbers for the project.

Unless you have cash in the bank it’s not cash.

@Jon Holdman @Nghi Le 

Thanks for the insights guys. Sounds like I need to reach out to some hard money lenders with a business plan to get pre-approved.

This post has been removed.

Originally posted by @Jon Holdman :

@Nghi Le I'm relating my experience, which is apparently quite different than yours.

Regarding this:

When investors advertise, "We buy houses in cash", the majority of the time that isn't cash; it's hard money. 

I'd say that in many cases the people placing those ads have no intention of buying at all, let alone with cash.  They're wholesalers.

I'm surprised things aren't the same in Colorado.  I've heard that was a similarly hot market compared to Seattle?  Do you have people who use hard money put a financing contingency in the offer?

Yes, they are wholesalers.  But the end result is still mostly investors with hard money.  Although sometimes they do buy and own it (for a few hours) through transactional funding.  Not in Washington state though due to the excise/transfer tax.

Originally posted by @Christopher Phillips :

Hard money isn’t as good as cash. It still has to go through an underwriting process and is subject to contingencies and can potentially be turned down if the lender doesn’t like the numbers for the project.

Unless you have cash in the bank it’s not cash.

 You can read my longer post (3 above yours) for the explanation.  Essentially, when you use hard money to make an offer without a financing contingency, the offer's as good as cash in the seller's eyes.  In my market, people who use hard money can close as fast as anyone with cash (about 2 days).

Hey Hunter,

I am also going to use hard money for my first flip here in the richmond,  va area.

I haven't found a property yet, but I'll definitely let you know how it goes when I do.

Good luck!

Originally posted by @Christopher Phillips :

Most hard money lenders will tell you they need at least 7 days.

As a flipper, I've closed deals with 12 different hard money lenders.  Timelines have ranged from 2 days to 30 days, from initial contact to close.  Lenders will tell you the biggest delay from borrowers is getting in all the correct documents (since they can't start underwriting).  From a borrower's perspective, the slowest HMLs are the ones that need to use appraisals in a hot market.  If you have a proven track record, there are some lenders that can close before the appraisal is done.

At the same time, I always try to have at least 3 weeks for closing when I make an offer.  Not just to give lenders time, but it ensures that I have enough time to do my due diligence, find contractors, and put a schedule in place so that rehab can start immediately upon closing.  You don't want to close, and then start planning for rehab; that's just time wasted into paying more interest.

Sometimes I also delay closings due to the time of the year, or due to the availability of my contractors, or how stressed I am with other projects.  I try to avoid releasing a flip during the holidays because the house would likely sit and again I'm paying interest on money for nothing.

Another advice I'd give for a new investor is to get a loan with at least a 12-month term for their first one.  Leave a lot of room for things to go wrong because most likely it will.  It's rare for a flip to go perfectly, even for a seasoned investor.

@Nghi Le

Sure. Someone looking to do their first deal won't be receiving the VIP treatment.

Originally posted by @Doris Butler :

Hey Hunter,

I am also going to use hard money for my first flip here in the richmond,  va area.

I haven't found a property yet, but I'll definitely let you know how it goes when I do.

Good luck!

 Doris! That's awesome! Do you mind if I ask what lender you are using and how your experience with them has been so far?

Good luck on your flip!

@Nghi Le@Christopher Phillips@Jon Holdman

Hello all, good back and forth. I have a quick question. I just applied for pre approval for HML, I do not foresee any problem getting it, but being it is for my 1st project the terms are not great. I understand I have to establish myself so that is ok. (90% purchase, 100% rehab, 12 Months, 4 points , and 12%) ouch but I am focusing on 6 month projects.

Anyway, my question. I applied for loan personally , I have an LLC, what is the process for protecting myself and processing the purchase through the LLC?

@Jason Guinard

Those are pretty good HML terms for someone doing their 1st deal. I'm surprised they would let you leverage that much for the 1st deal. What's the loan (underwriting, processing, documentation, etc.) fee, how long is the term, and will they charge you interest on the undrawn rehab funds? You should also ask them how long it will take for them to close and make your offers accordingly.

How come you didn't your LLC name down for the loan (as opposed to your personal name)? Do you currently have a contract on a project? Make sure your LLC name is written down as the "Buyer" for the property. You should talk to an attorney and CPA about how to run your entity correctly so that you are properly protected.

@Nghi Le

Thank you for the info Nghi.  I am not sure of those upfront fees, but I will check on that tomorrow.  Term is 12 months no fee for pre-payment, Yes they do charge interest on the un-drawn funds, they said 3 weeks on funds.  

I didn't think I could use LLC name because I do not have any established credit and or income through LLC?? Nothing under contract, they said they would pre approve me for max I qualify for and supply me with POF's. I will make sure I buy under LLC, that's why I was asking about having approval in my name. I will also check this with lender tomorrow.

I am going to check in with attorney and CPA before going through with anything.  Thank you again.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.