Hard money advice - help me not be stupid

8 Replies

I’m going to be shopping for a hard money loan for an upcoming duplex acquisition and rehab.

1. What are red flags that would signal ‘this is a terrible deal/rate/terms/they are crooks’? What should I avoid?

2. What are signs of a good deal/rate/terms that I should seriously consider? What’s acceptable?

3. What would tell me ‘this is an amazing deal/rate/terms and I should sign right now?’ What would be a slam dunk no brainer?

Examples of deals you’ve done are much appreciated for case study 📚 comparisons. Thanks!

In my experience, private lenders usually charge a loan origination fee ( 2%-5% ) and monthly interest-only ( 12% annualized ) payments for a specific period of time. A lot of them also require a % down from you regardless of how good the deal is. They might require 10%-20% down based on the purchase price but will fund 100% of the rehab as long as the ARV is solid.

I would try to avoid lenders who charge additional fees like application fees, processing fees, underwriting fees, etc... They are already charging a high rate and monthly interest only.

Also, if you try to buy under an LLC they will most likely still require you to personally guarantee the loan.

Good luck! 

Best option would be for a No prepayment penalty or the option to pay it off on a reduced sliding scale. Meaning if the pre-pay is 2% of (x) use $200K as an example you have the option for a reduced pay usually for the first, second and third year. So First year $4K 2nd year $2K 3rd Year $1000. Every hard money lender is different but I would check rates and see if a 3/1 ARM or a 5/1 ARM has better pricing and try and evaluate how many points and what are the hard costs.

There are no good deals when your going hard money, its what results is the ROI.

1. What are red flags that would signal ‘this is a terrible deal/rate/terms/they are crooks’? What should I avoid?
2. What are signs of a good deal/rate/terms that I should seriously consider? What’s acceptable?
3. What would tell me ‘this is an amazing deal/rate/terms and I should sign right now?’ What would be a slam dunk no brainer?

1. Exorbitant up-front fees, lack of references, and "too-good-to-be-true" terms.

2. For your type of project, interest rates will generally range from the high single-digits to low double digits with a few origination points. Leverage will likely be somewhere between 80-90% LTC, and capped at 65-70% LTARV. Note that it's possible to get slightly higher leverage than this given some exceptional conditions (ample experience, great market velocity, etc.) Also, depending on the scope and length of your rehab, interest charged only on disbursed funds may be an important point.

3. Most hard money lenders are going to be around the aforementioned ballpark. If they're not, that in and of itself can be a red flag.

Best,

Michael

Originally posted by @Justin Gottuso :

I’m going to be shopping for a hard money loan for an upcoming duplex acquisition and rehab.

1. What are red flags that would signal ‘this is a terrible deal/rate/terms/they are crooks’? What should I avoid?

2. What are signs of a good deal/rate/terms that I should seriously consider? What’s acceptable?

3. What would tell me ‘this is an amazing deal/rate/terms and I should sign right now?’ What would be a slam dunk no brainer?

Examples of deals you’ve done are much appreciated for case study 📚 comparisons. Thanks!

Hey Justin

  1. Up front money for an "application fee" is a non-starter.  Up front money has to go somewhere whether it's for an appraisal or to an attorney for an entity review, but and application fee isn't one of them.
  2. Right now rates are around 9% interest only and below and points are anywhere from 3-4.
  3. Most lenders charge an underwriting fee and there may be a processing fee in there.  Not uncommon
  4. Keep the LTV at 75% below the ARV all in, including carrying costs and you'll be golden.
  5. Make sure you know your numbers and your market before you sign a contract

Stephanie

 

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