HML contract examples

[Petit Morne]

Hi,

Does anyone have any examples of what a HML contract looks like?
I'm thinking about taking one for the downpayment on a house (20% + closing costs) but honestly I only heard about HML/Private money a few months ago and it seemed to be a bit sketch to me at first but now I'm learning that it's done MANY times and MANY places.

I just want to know what I should look out for in the contract.
Say if for some super strange reason I'm not able to make payments and the bank forecloses on their 80% equity (I put 20% down) how would the HML be protected?

How does the HML put themselves in the "1st" position during a foreclose process such as the one outlined above?

Do the HML have lawyers or do they just use "muscle"?

[Jon Holdman]

Its extremely unlikely you will find a HML who will lend you the 20% down payment. I won't say its absolutely impossible, since there are certainly dumb people out there with money. But its certainly not the normal process.

If the first lender foreclosed, the HML would be screwed. Their 20% would be almost worthless. Once the 1st adds on their fees and the costs, and the value of the property degrades, its likely the second would get almost nothing.

No, HMLs don't use "muscle". You're thinking of loan sharks, not HMLs. Some people might equate them, but HMLs are a perfectly legitimate business.

No, the HML can't "put themselves in the 1st position" in the situation you describe. That's why most will never do this deal.

Some HMLs will lend based on ARV - after repaired value. That is, they will appraise the house based on the work you propose to do, and lend based on that value. Some want a down payment, some don't. Some will lend you all or part of the rehab money, some won't.

If you're wanting to fix and flip houses, you really need some cash. End of story. If you find a good enough deal and have a HML who requires minimal down and will give you some of the rehab money, you might get by with as little as 10-15% of the ARV. If your deal is marginal and your HML wants skin in the game, you may need more like 25-30%.

Example 1:
HML will lend 70% of ARV, no required down payment:
Purchase: $60K
Rehab: $10K
ARV: $100K
Loan: $70K
Purchase costs: $1000
Points: $2800 (four points, i.e., 4% of the loan amount)
Holding costs for six months: $2000
Interest payments for six months: $5250
Total cash needed: $81050
Less loan: $70,000
Your cash needed: $11,050

In addition, you'll need cash to pay for repairs then the HML will reimburse you.

When you sell:
RE commission: $6000
seller concessions: $3000
closing costs: $1000
Net from sale: $90,000
Less loan payoff $70,000
Less your cash invested: $11,050
Profit: $8,950