Real Estate Investor · Freeport, NY · Member since 2011 · 17 posts · 0 votes
Hello all,
I have 3 questions that I am a bit confused about.
1- They always say do your research and due diligence on property, but how can i find out if the property has any back taxes or liens that will affect me later on?
2- I am a bit confused with wording and numbers, when reading about Hard Money lenders, In a book i was reading recently is stated " …a typical hard money loan may be 70-90% financing for 6 months, paying 2-3 points and 15% interest or more." What the heck does that mean? Can someone explain for simplicity sake the arv is 100k and purchase price is 20k, and 15k in repairs how this deal would work out.
3- With those same numbers how would the numbers pan out using private lenders?
" ...a typical hard money loan may be 70-90% financing for 6 months, paying 2-3 points and 15% interest or more."
1. 70-90% financing means either:
a. 70-90% of the ARV, or
b. 70-90% of the purchase price or
c. 70-90% of the combined purchase price plus rehab costs
However, many hard money lenders won't go to 70% of anything, and are at 60% or 65% of one of the above. Some are at 50% of purchase
2. for 6 months means usually you have to pay the loan back in full at the end of 6 months. Usually you make interest-only payments during the 6 month term
3. paying 2-3 points: a point is 1% of the total loan, so a $50,000 loan would generate a $1500 upfront payment to the lender if he charges 3 points. Occasionally lenders will defer points til payoff or roll them into the capital balance of the loan if the loan is a commercial loan.
4. 15% interest is exactly that: 15% simple interest per year on the outstanding principle balance. Take the outstanding balance, multiply by 15% and divide by twelve months, and that's an estimate of your monthly payment.
The loan you are looking for is probably $35K, which is too small for most hard money lenders, but you may find one in the local area.
You may find it extremely valuable to take a finance class. Your options may include a class or more at a real estate trade school. Another is one from a college offering continuing education. The costs vary. The classes can be as little as one day or a week.
Understanding finance may be extremely helpful to your success.
A title search (usually done by a title company or attorney, but lay people who know their way around the records office can pull their own) will reveal any recorded liens on the property. These searches usually cost $75-100 and are typically part of the settlement services provided. For unpaid property taxes, you can probably see this on your county tax assessor's site as well, and it's always a good idea to check there yourself early on when evaluating a deal.
Were your numbers hypothetical, or do you think you have such a deal as you stated?
Commonly a HML will state that they will lend you the lesser of these: (a) 65% of ARV, and (b) 90% of purchase + rehab. The rehab funds will be escrowed (held by the title company or attorney) and disbursed as the work proceeds. You will often need to front the first leg of the rehab from your own funds. You then get the rehab loan installments paid to you after the work has been verified. Having a nice line of credit at Home Depot or Lowe's is nice for this purpose (or any credit card, for that matter).
So typically you might need your own upfront cash to cover the following: down payment, loan closing costs, points, insurance/taxes during holding period, and 1st leg of rehab (perhaps 1/3 of rehab). Some lenders will defer some or all of the items noted after the down payment, until the house sells, as long as the accumulating loan balance doesn't rise above 65% of ARV. A few will defer everything to the end if the deal is extremely strong and you are very experienced.