When using hard money, how does the down payment work? Given that it's a reno and they seem to lend on ARV, the purchase price of the house is essentially taken care of. Do you then cut a check to the lender at closing?
It’s stoically 10-15 percent downpayment
@Caleb Heimsoth Yes, but paid to whom? Check gets cut right to the lender or seller?
Not sure but probably the seller through a title company. Hard money is just like any normal lender it’s just more expensive and they are more creative with their lending terms.
It's paid to the title company, who then distributes it to where it needs to go - pay off existing liens, and proceeds to the seller if applicable. It functions just like any other loan, always escrowed through title. They and you don't want it any other way.
@Brad Shepherd Got it, thanks.
So then the remaining funds beyond the purchase price go into escrow, correct?
If you're borrowing rehab dollars, then the hard money lender will typically hold those in their own account and distribute them to you as draws after work is done. If you're not borrowing rehab dollars, there won't be excess funds unless you found the miracle lender that'll give you >100% LTV.
Ha! Nope, we're looking at a place that is in need of a lot of love, maybe tough love, but could potentially have a large payoff given the median selling prices in the area. So yes, rehab dollars will be involved.
I've never done a hard money loan and the machinations are still confusing to me. Thanks for the feedback.
I was confused as well not too long ago, but have a better understanding now. So using real numbers as an example...
If the hard money lender's terms say they will loan up to 70% ARV and up to 90% LTC (overall cost of purchase price and rehab combined), and 3 points...again all just as an example, here are hypothetical numbers:
• purchase price - 75,000
• rehab cost - 50,000
â¢ ARV - 185,000
In this case, the 75,000 + 50,000 = 125,000 which happens to be only 67.5% of ARV (125,000/185,000 = 67.5%). However, this does not mean that the lender will finance 100% of your project just because it falls under the 70% ARV (I used to get confused on this part). You will still have to pay 10% of the 125,000 to adhere to their 90% LTC policy, so that means $12,500 for down payment.
This leaves you with an actual loan of 125,000 - 12,500 = 112,500. So then the 3 pts that the lender charges means you take 3% of the 112,500 = $3375. This number typically is added to your upfront costs, so now you’re looking at $12,500 of down payment plus $3375 of lender pts all to be paid upfront at closing. And whatever other random fees, if any, there might be between lender/escrow agent.
Hope that makes sense.
@Tae C. That's a great break down. Much like these loans I'm about 90% of the way to understanding them, haha.
I was looking for this exact question! so the down payment of 12.5k (not including the 3 pts) is paid to complete the required amount of 125k and does not go directly to the lender as profit?
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Seller owns property free and clear and you guys sign a purchase agreement for 100K
You put down 10% which is 10K to the seller(skin in the game)
Your hard money lender put in 90K, which is the rest of the money due to seller, to get to that 100K owed.
Then Escrow closes and your seller has the 100K owed to him and then you pay the lender who put in 90K monthly interest only payments till you resell/refinance the property paying off the 90K owed to him.
The hard money/private lender will want to see that your buying the property at a discount to ensure safety on his end and the less the discount the more money he will want you to put down.
And there will be closing costs on your end as well to pay to close the purchase, sorry I left that out. So it will be more than the 10K you initially put in.
Thank you mike Flora for the explanation. I have also read that some lenders finance 100% of purchase price and rehab, but they still require a down payment.
In this case, does the down payment that is paid by the borrower go to the lender as profit/rehab budget or are the articles and threads im reading not including the LTC in your example?
I understand the points, fees and closing costs.
@Jim Shack there are different ways to loan people money on these real estate deals but never heard of the 100% financing and rehab financed as well. Not saying there are people doing this but as you said I would imagine even more profit to that lender on the closing cost fees and of course the interest only payments he will receive due to funding 100%.
Thanks for the reply @Mike Flora . That's basically the missing piece I've been looking for (outside of that pot of gold that would make HML unnecessary, haha).
@Cosmo Iannopollo I wish there was a pot of gold! Once you start getting some volume on your rehabs the hard money will make you a lot more money than using all your own money on flips. Don’t forget that!!! Leverage is the key to accumulating more flips and rentals, especially if your starting out in this business with minimal amounts of cash.
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