1st Time Using Hard Money

8 Replies

Good Morning BP Universe,

Yesterday I came across a property on my local (Cincinnati) REIA website. The seller said in order to walkthrough the property, I had to have "Proof of funds". So I called around to a few Hard Money Lenders, and I was accepted by "Ground Floor". The lady I spoke to was really nice but there was a few things she told me that I didn't quite understand. I asked for clarification, but I still couldn't wrap my head around it.

1. She mentioned they have a $200 Withdrawal (Draw?) fee. She said in order for them to give me the money, I have to tell them exactly what was done on the house. Then they will send someone out to make sure progress is being made on the property. Then they will reimburse me for the money that was spent. What I don't understand is, where am I supposed to get the money in the first place in order for them to pay me back? 

2. They said they don't charge any points, they only have a flat interest rate. I understand what interest rates are, but what are points?

3. They charge a $1500 closing cost. $250 of that is for the Loan Application Fee, and then the remaining $1250 will be due at closing. Is this normal for Hard Money Lenders to ask for these? I understand I have to pay them back the money I borrowed, plus the interest rate. Why do I also have to pay a closing cost?

Thank you all in advance for any advice you can provide. 

@Montez Greer

1. They probably aren't financing 100% so they expect you to use your down payment.

2. Points are a loan origination fee that are 1% each.

3. The closing costs are the cost to service the loan if you find a loan without them you should open a unicorn farm.

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In my experience it's uncommon to find a HML that does not charge 1 - 2% in points up front. That's a nice "feature", and transfers more risk to the lender. I assume they charge a higher interest rate for that?

1. If rehab withdraws are paid in arrears, as is common, then besides having money for a down-payment, closing costs and loan carrying costs you ALSO need to bring in some rehab money at least until the first draw. And if you are busy wondering where you are going to get this initial rehab milestone money, strongly consider if you are ready to rehab. The possibility of rehab and exit strategy cost over-runs and, just for instance, incompetent/unscrupulous General Contractors need to be considered when you are planning your numbers. Like a card player going into a game without sufficient reserves for a bad or misplayed hand, you need to bring money into this game or risk losing your shirt. So Save Up!

2. 1 point = 1% of the total loan. Hard Money is convenient but not cheap money. If they don't charge points then the Hard Money Lender will get paid in other ways - usually in loan fees of various descriptions and and interest rates. If you are not paying, in one way or the other, at least (very approximately) $7K to the lender, you need to make very sure that said HML is legit.

3. It is not unusual for up-front fees to be asked. In the Bigger Pockets community many people (though by no means all of us) take this as a red flag. As for the rest of the question, $1,500 in total for closing costs is ridiculously cheap. Combined with no points you either being charged sky high interest rates worthy of a NASA rocket launch or there is a huge red flag here that needs to be considered.

Thank you @Kris Wong @Benjamin Hurwitz and @Aaron K.  

This information was very helpful. They said they charge interest rates ranging from 7-14%. And Bigger Pockets have them listed on this website for suggested lenders, so I would hope they are legit. Now I will do more due diligence to make sure Ground Floor is a legit organization. Thank you guys so much for you input.