Hard Money Lenders - Chicken or the Egg

15 Replies

Newbie from L.A. here. Trying to make first deal happen. I'm finding that any deal that is truly a deal is going to immediately have multiple offers. Though I have a substantial amount of cash ready to go, I'm still going to need HM to complete the deal. As I understand it, any HML is going to need a whole dossier before making a decision whether to lend me the money. Can I make an offer on a place without knowing if/when I'll get the HM? And isn't it going to take time for the HM to make a decision -- inspections, etc? What seller with multiple offers is going to wait around for that?

You should line up financing before you make an offer on a property, otherwise most people will just ignore your offer. My question is, why are you choosing hard money? I'm assuming you're trying to flip the property, but I'm just concerned that you'll have more costs associated with going the hard money route, especially for your first property.

Medium mogul logo web smallPeter MacKercher, Mogul Realty | [email protected] | 314.210.4414 | http://stlmogul.com | MO Agent # 2010004223

Originally posted by @Peter MacKercher :

You should line up financing before you make an offer on a property, otherwise most people will just ignore your offer. My question is, why are you choosing hard money? I'm assuming you're trying to flip the property, but I'm just concerned that you'll have more costs associated with going the hard money route, especially for your first property.

I'm considering hard money for a couple reasons. First, I'm afraid that the condition of the property I'm acquiring won't qualify for conventional financing. Second, it seems that any deal that is truly a deal is going to have a lot of buyers swarming all over it -- I don't think I'll be able to compete unless I can close very quickly, and again that rules out conventional financing. Is it possible to line up financing with a HML before I actually have a deal? All my research has pointed to them having to see the specific deal (which I don't have yet) before being approved.

Originally posted by @Michael Noto :

Get approved with a HML in advance just like you would with a conventional lender this way you are ready to act when a good deal comes along.

That's kind of my point. All the HML's I've had preliminary conversations with have given me similar responses: Bring us the deal, then we'll decide whether or not to approve you. I've been through the conventional lending process several times where they make their decision based on me the borrower, as opposed to the specific deal. Am I talking to the right HML's? I haven't met one yet that's going to pre-qualify me regardless of the deal. But if I can find someone like that, it would make things MUCH easier.

@Andrew Robbins

I am still looking for my first deal, so take this with a grain of salt. I reached out to an HML regarding an FSBO I found. I explained myself and attached a detailed analysis of the property. It included purchase price, estimated rehabs, holding costs, closing costs for both transactions, and showed estimated profit. Another column showed analysis if I held the property for 6 months, refinanced and turned it into a rental. Finally, I showed numbers doing the same, but using a lease-option. He sent me an application packet and told me that it was the most thorough property analysis he ever saw, especially for a first-timer. He agreed to fund me. The terms aren't spectacular, but in reading these forums, it appears that it is rare for HML to fund a first-timer on his own. My initial terms are 6 points and 14%. There is a 6 month minimum (pre-payment penalty). My skin in the game is 10% of the purchase price. It can go to closing, inspections, whatever. Just 10%. He will lend up to 65% ARV. While this is expensive, I look at it like I just have to be patient. I have to find a deal and pay less than others. The cost of the money is factored in to the analysis. When I find a deal, I will contact him and send the numbers. He will verify and fund it. So, that's my situation. Hope it helps.

@Andrew Robbins

Also, I am allowed to roll accumulated interest over and pay it when I sell/refinance.

Originally posted by @Jason Krick :

@Andrew Robbins

I am still looking for my first deal, so take this with a grain of salt. I reached out to an HML regarding an FSBO I found. I explained myself and attached a detailed analysis of the property. It included purchase price, estimated rehabs, holding costs, closing costs for both transactions, and showed estimated profit. Another column showed analysis if I held the property for 6 months, refinanced and turned it into a rental. Finally, I showed numbers doing the same, but using a lease-option. He sent me an application packet and told me that it was the most thorough property analysis he ever saw, especially for a first-timer. He agreed to fund me. The terms aren't spectacular, but in reading these forums, it appears that it is rare for HML to fund a first-timer on his own. My initial terms are 6 points and 14%. There is a 6 month minimum (pre-payment penalty). My skin in the game is 10% of the purchase price. It can go to closing, inspections, whatever. Just 10%. He will lend up to 65% ARV. While this is expensive, I look at it like I just have to be patient. I have to find a deal and pay less than others. The cost of the money is factored in to the analysis. When I find a deal, I will contact him and send the numbers. He will verify and fund it. So, that's my situation. Hope it helps.

Thanks for reaching out. It does help. I was on the fence about sending a hypothetical deal to a HML for fear I'd be wasting their time, but looks like you got a response with some numbers you can work with for the future, so that's encouraging. My dilemma still remains knowing whether or not I can get HM and at an acceptable rate when I actually want to make an offer -- especially in a time crunch when there are multiple offers on the table for a property that was just made available.

@Andrew Robbins

It doesn't hurt to ask.  I now know that if I offer on a property for 100k, I will have, at minimum 6k in points, 7k in interest for the purchase, another 2 or 3k for financing rehab, and 10k out of pocket.  Factor in the other costs, and I know if it is a deal or not.  Cash buyers will have a 15k head start on me, so I will need to be quick and/or creative.  I won't shrink my margin to compensate for the cost of money.

Originally posted by @Andrew Robbins :

That's kind of my point. All the HML's I've had preliminary conversations with have given me similar responses: Bring us the deal, then we'll decide whether or not to approve you. I've been through the conventional lending process several times where they make their decision based on me the borrower, as opposed to the specific deal. Am I talking to the right HML's? I haven't met one yet that's going to pre-qualify me regardless of the deal. But if I can find someone like that, it would make things MUCH easier.

Hey Andrew, We're a HML based in OC. I'd be happy to get you a pre-approval. I also get several wholesale deals sent my way on a daily basis. They're not all great but if I come across something that fits your criteria I'll connect you to the deal. Let me know how I can help.

@Michael Noto

Thanks.  It's nice to know I'm not the only one.  I'm just excited I have funding.

lt sounds like you have your problem potentially taken care of with Matthew Nixon but I wanted to point out another positive for a newbie (including myself) investor using HM. An experienced HML is not going to lend money on a house that is a bad deal. So that is just another way to verify you're not buying a money pit. Obviously you still want to analyze the deal yourself first but they are reassurance that you are doing the right thing. If you can't find a HML to fund your deal, odds are it is not a good deal.

@Jason Krick 6 points is expensive. How many different HMLs did you reach out to? I know you're a beginner but they will underwrite the deal the exact same way if it's your first deal or your 20th so that really doesn't play a huge part. Don't bite on the first guy who said he would lend to you. In my area 3 points and about 12-14% is the norm. Keep shopping around.

@Zach Mitchell

I contacted a few, as well as one commercial lender I was referred to.  The typical response was a heavy sigh, followed by, "do you have any experience at all?"  When I answer no, they'd send me on my way, or reluctantly send me an application and made sure to say that they would do their best to see if they could do something.  Believe me, I understand the apprehension, but I thought that if the deal was good enough, they'd underwrite the deal.  Some wanted 2 years business tax returns.  These guys said yes.  I admit, I stopped there.  Maybe I should keep looking...

Originally posted by @Jason Krick :

@Zach Mitchell

I contacted a few, as well as one commercial lender I was referred to.  The typical response was a heavy sigh, followed by, "do you have any experience at all?"  When I answer no, they'd send me on my way, or reluctantly send me an application and made sure to say that they would do their best to see if they could do something.  Believe me, I understand the apprehension, but I thought that if the deal was good enough, they'd underwrite the deal.  Some wanted 2 years business tax returns.  These guys said yes.  I admit, I stopped there.  Maybe I should keep looking...

 They'll be knocking on your door once you have a few under your belt :)

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