Hard Money Costs Too Much?

Question

Does Hard Money typically cost 30-40% of the purchase price??

I am considering buy a home to flip. I have done a handful of flips using cash, partnering with friends, and making it work.

I am eyeing up a property I want to buy that costs much more than usual so my plan was to use a hard money loan to purchase, and rehab it with my own money, then sell.

I talked to a hard money guy and I was shocked at the numbers.

$325k purchase price.

$220k loan amount.

$120k out of pocket money down to obtain the funds.

Huuuh??? What's the purpose of trying to get a loan when I have to pay that much out of pocket just to get it?

Jaycee Greene · Answer

Hey @Vincent Plant. Most of the HMLs I work with would provide up to 85% of the purchase price and up to 100% of the rehab costs, but this can't go over 75% of the ARV.

Patrick Roberts · Answer

Are you asking about the costs of hard money, or the loan amount/LTV? If youre saying that the cost of the loan are approx $100k for these figures, then yes, that is ridiculous. If youre asking why the loan amount is only $220k and you have to bring $120k in a downpayment, then the lender is likely being conservative due to the variables of the deal (or maybe this is an inexperienced lender).

The loan amount is 67% of the purchase price. I would touch base with the lender and get some feedback on why they are capping the LTV. It may be that they are underwriting the property at a significantly different valuation than what you are using or that they feel that you or the deal is excessively risky.

Nicholas L. · Answer

@Vincent Plant

doesn't that probably include the rehab?

hard money is typically: some amount down + points to get the loan + interest to service it

so if purchase price is $325K, you might be able to get 10-15% down from your own cash + the HML for the rest

it's not clear from your post what is going where

Stuart Udis · Answer

@Adonis Williams Presumably Vincent has targeted a distressed opportunity. Who is providing 85% LTV financing on that? Even if such a loan existed (which I doubt), once Vincent self funds all improvement costs, finance charges, carrying costs etc., I doubt he's any better off.

Stuart Udis · Answer

Banks who offer construction financing tend to be 75-80% LTC and alternative/hard money lenders will sometimes offer higher LTC leverage than that. However this is never an apples to apples comparison. Depending on the lender (bank or alt. lender) you have to look at origination fees....points, doc prep, interest rate, frequency draws are allowed/min. draw amount allowed per request, interest payments vs. interest reserve & whether interest reserve is capitalized to fully understand the true cash requirements.

Often the hard money lenders that appear to offer the best leverage actually require more cash when looking at the entire picture. Most stop their analysis at LTC leverage which is a flawed approach. Second biggest mistake is failing to realize these construction loans allow draws on improvements meaning cash expenditures are required before the first draw can be issued. Not many have vendor relationships that allow for no out of pocket cash outlays before enough improvements are made for a meaningful draw release.

Trevor Finn · Answer

Hi @Vincent Plant,

If your plan is to flip and sell quickly, that 40% out of pocket seems steep. Most hard money lenders base their terms on the deal’s equity and your experience, so with a solid flip track record like yours, you should be able to find better leverage — especially if the deal has a strong ARV.

What's the ARV on the property?

Erik Estrada · Answer

Hi Vincent,

I think the confusion here is the downpayment aspect of the loan. It sounds to me that your current lender is offering 67% LTV, which is the norm for most true hard money lenders.

The stuff you see here on BP is institutionalized hard money. Will likely take longer to close than a traditional hard money (they have to order an appraisal, satisfy lender conditions etc..). These loan types allow you to do up to 90% of the purchase price and 100% of the renovations financed as long as you meet experience, credit, and LTC/ LTARV requirements based on an appraisal or virtual inspection. These are excellent if you can do a 12-14 day close.

A true hard money lender can get you loan docs in 3 days. It does not have to go through all the scrutiny like these other institutionalized lenders. They are usually funded by very wealthy people or a group of investors pooling money together. The tradeoff is the higher downpayment.

Katie Smith · Answer

Hi Vincent!

As many have mentioned, most fix-and-flip loans allow lenders to fund up to 90% of the purchase price and 100% of the rehab costs, but they typically won’t exceed 75% of the ARV.

However, If you're not including a rehab budget, lenders often cap the loan at around 70% of the purchase price, which might explain the situation you're encountering.

It’s generally more advantageous to include a portion of the rehab budget in the loan. Just be sure to choose a lender offering non-Dutch interest on the rehab funds, meaning you only pay interest on the rehab portion if you actually draw on it. This provides you with a safety net for any unexpected expenses during the rehab process while also potentially allowing you to secure higher leverage on the purchase price.

Brandon Croucier · Answer

Hi Vincent, there is a significant difference in true Hard Money and rehab loans, rehab loans won’t be low doc by any means.Hard money should be fairly simple & quick to fund, it’s strictly equity based.

How bad is the condition of the property?

Depending on your experience will determine the maximum LTV on a rehab loan. Typically 80-90% of pp + 100% of rehab

Pick your poison, you get what you pay for.

Adonis Williams · Answer

Since the LTV on the hard money loan is high , I would personally purchase it using a bank statement loan at 85% LTV (15 percent down) and, as you mentioned, just use your cash for the rehab. Hard money loans have a high barrier to entry, which is  20-40 percent down. So just do bank statement loan if your monthly 'revenue' can support it.

Hard Money Costs Too Much?

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