Hard Money ONLY used WHY? Please Explain

12 Replies

I am currently running the numbers to try truly grasp, why hard money over conventional loan.
Besides credit and things like that, why Hard Money?

Most HM will lend up to 75% of Purchase price, or is it 75% of ARV? Because if its purchase price, that makes no sense.

Please someone make sense of this for me.

Example:
Purchase price 75k
ARV 105k

Origination at 1% min, 750.
Interest example 9%, 562.50 / Annual 6750
Plus I have to come up with a down payment?

How and why is this a good deal.

One reason someone may do it is that the closing is required to happen quickly. Hard money usually moves at the speed of cash closings. It is for people to use very short term to close deals they would otherwise not be able to fund themselves. It also doesn't report to Fannie or Freddie so it won't effect DTI.

Secondly, sorry just thought of this, but we usually have more meat on the bone and if someone wants to close distressed properties that won't pass a traditional mortgage inspection. There are 100 reasons why someone may use hard money but if you can get into hard money that cheap that is a steal. Private money around me usually has 3 points and between 10%-14%

Different Private/Hard money lenders have different funding amounts and will generally analyze the deal to offer their funding.

@ zachery 

@Zachery Buffin
Hi Zach, I totally missed that, yes of course for As Is properties, no lights, no water, you cannot get conventional financing, but why else would someone want to get into this loan?  You still have to come up with a down payment.  The ONLY reason is conventional will not allow to go into something without inspection of electric and water.

Originally posted by @Michael P. :

@ zachery 

@Zachery Buffin
Hi Zach, I totally missed that, yes of course for As Is properties, no lights, no water, you cannot get conventional financing, but why else would someone want to get into this loan?  You still have to come up with a down payment.  The ONLY reason is conventional will not allow to go into something without inspection of electric and water.

 Not just for that reason, though that is primarily what I see around here but if you factor your hard money costs into a deal you can just account for the new numbers. Traditional mortgages have a lot of stipulations and rules not to mention you can only have a certain amount of them out at a time as an individual. 

As I said above these loans don't report to Fannie or Freddie and so aren't part of a persons debt-to-income figures. You can also refi out of hard money later in a traditional mortgage after repairs have been done. Honestly the reasons someone might do it depend largely on their circumstances at the time and the deal on the table. I could give you a ton of examples about when these loans work for a flipper or for a BRRRR strategy but in the end the deal, the math, will determine if it is viable or not.

Agreed. HML works great for quick closings. If you are buying from a WS you can only go cash or HM. If you are after a listed property HM will be more appealing than any financed offer so you have some leverage there.

HM will also work if you are already maxed out on conventional loans and cannot get a new one. Many HML will also finance your purchase and rehab cost, something conventional loans don't do (unless FHA or some special products).

I would say it should not be your plan A since it is definitely expensive but it should definitely be in your belt as a very good plan B/C.

Happy Investing! 

Many bank owned properties want a quick close ( under 25 days). Auction sites like Hubzu often consider HML or private money the same as cash. If the fees and rates of a HML allow you to buy a property that is 20% - 40% less, then it is worth it to pay the fees.

Also, the HML doesn't care much about my personal expenses. They just don't care that I currently don't have a high income. I wouldn't qualify for loans at traditional banks. HML is about how good the deal is and if you have enough cash to put a % down.

Exactly it is a tool, an option, if your conventional lending falls through for some reason and you still can work the deal. Obviously there are pros and cons to everything out there but never shy away from an option if you can make it work. On the particular deal in question I don't know that a flip would work but it might be BRRRRable 

Originally posted by @Michael P. :

Hi Zach, I totally missed that, yes of course for As Is properties, no lights, no water, you cannot get conventional financing, but why else would someone want to get into this loan?  You still have to come up with a down payment.  The ONLY reason is conventional will not allow to go into something without inspection of electric and water.

 It is not just lights and electric being on. There are numerous things that must be fixed before a conventional loan will fund (foundations and roofs come to mind), and most of these properties that HMLs lend on are being sold by people who are distressed and can't afford to do it themselves. 

Also, as others mentioned, 7 day closings instead of 45-60 day closings.

Two other things to clarify - credit requirements aren't that much different than a bank with most hard money lenders. Sure some will give you a no doc 20% rate loan, but most of the time we don't want to see collections or past due balances, etc. It is a misnomer to expect that people will go to hard money lenders because they have no money or no credit and will get a loan. 

Along with that, the hard money lender that is requiring 25% down payment is probably not giving you a very competitive quote. Most of use finance 65%-75% of ARV - big difference than 75% LTV, which is what you described.

@Jason Hirko @Michael P.

This is great info too which I had not addressed and I am glad you made these points. I work with an in-house hard money lender and we will (under specific circumstances) offer up to 90% ARV loans but every hard money lender is different. Ours looks at credit of the potential loan candidate as well as money on hand and other criteria but will rely 100% on our valuation of the deal, as they are our lender, and not fight you for an appraisal to get the ARV numbers. Like I said pros and cons to each source of funding out there and each can be another tool in the belt.

All hard money lender's have different standards.

It makes sense usually because you can't get a conventional financing. If you can get commission financing, do it.

First question I asked every single person who calls me, 'have you tried calling a local bank? "

Once we check that off the list we can move forward.

There's a reason that this option exists.

@Michael P.

While hard money can be expensive you need to remember to look at the total cost of doing a deal, and what your out of pocket costs will be. Do you need to come up with a downpayment? Will the lender cover some or all of the rehab costs? Will they cover some or all of the loan costs? What are draws going to cost? What are your monthly payments going to be? There's more to compare than just points and interest.