What is a hard money lender?

Question

Trying to learn a bit of the terminology and meanings. Can anyone explain this? In my mind I imagine a loan shark  :mrgreen:

Jon Holdman · Answer

As outlined in another post where you replied, it is possible to get cash back at closing.  The HML will have some criteria, such as 70% of ARV.  If the price, plus the rehab, plus all the costs is less than the max loan amount, you may be able to get some cash.

That said, you'll need some cash to cover the up front expenses, and to pay for the rehab.  Typically, you pay first, then get money back from the lender.

Most of your payday will come when you sell and not before.

Flipping houses is a manufacturing process, just like buying leather and turning it into shoes.  You need to have some money to pull it off, and to carry the inventory while its waiting to sell.  You can finance a big chunk of it, but its very difficult to do fix and flips with no cash of your own.  You should plan on having 10-15% of ARV of your own money to commit to this business.  Once you've sold the first house, you can take some the profit, as long as you retain enough money to do the next one.  If you want to get to a position of doing several at once, you need to build up that increment for each one.

Tiara Murray · Answer

So the investor doesn't see any money until he/she flips it?

Jon Holdman · Answer

The title company that's handling escrow.

Tiara Murray · Answer

So after being approved for the HM loan, who actually gets the check, is it the investor, or the seller of the property?

Kel S · Answer

So who are the hard lenders...banks or just indivual investors and how do you locate those willing to loan hard money? I'm not in need right now, just want to learn in case one day I would want to utilize that route.

Will Barnard · Answer

There are both individulas as well as companies set up to do HM loans.
Ask around your RE investment club, ask a mentor, ask here on BP (there are several HML's here) search the internet, and ask around to other contacts in the biz.

JCL REI · Answer

Disclaimer - we've never used HM and the HM lending landscape changes just like anything else... from my understanding, HM typically has been a lender who would loan you money based on the house and not your credit... I believe in recent years they changed and take credit into a small account but look more heavily on your experience and the deal itself on whether or not to lend money. It is short term money and you can close quicker with HM than with a traditional loan if you need a fast closing... but you either want to be able to fix and sell quickly or refinance the house if you're going to keep it.

Curt Davis · Answer

Kel,

A hard money lender is someone who will lend you money to purchase a house, usually they will do 70% of the ARV. There is interest that they charge you, usually 5 points interest on the front end which they take out of the funds right away and then they charge you 1 point interest every 30 days until the loan is paid back, usually 90-180 days. I buy all my property this way and I help all my clients buy them this way also. One thing to keep in mine, never get a hard money loan without a way to pay them back.

Jon Holdman · Answer

I've both borrowed and lent hard money.  Today we do consider credit and reserves.  Once upon a time, only the deal was considered.  Those days seem to be over.

Rates vary depending on the lender.  I've seen it as low as 2 points and 12$ (squishy money, that lender calls it) but that lender only does 90% of purchase and 90% of rehab.  Ours are typically 3-4 points and 15%.  I've also seen 0 points, but a $1000 flat fee and 18%.

Generally short term, six to nine months.  You'll need an exit plan, either a refi or sale, before the term is up.

LTVs max out about 70% based on ARV.

Don't plan on any slack.  If you can't pay, give the lender a deed in lieu.  There aren't going to be any forbearance agreements, short sales, or loan modifications.