How does hard money lending work?

8 Replies

I am working on acquiring my first flip.  I found a good deal if I can get it.   Now I am working on the money.  I thought the money was based on the property not you.  How do you get a money lender to do business with you when they are helping and supervising the deal.  I don't have a problem with the helping or supervising, I need it.  But how do you get started?  I am frustrated and stressed! I am so close.

@Peggy Ann Thrower Hard Money Loans or HML's are most often set up through a mortgage broker that has people that invest money through them by loaning to others. HMLs can be used for a variety of reasons. A tight money market, a non conforming property, a high risk deal, a borrower with a bad credit record, etc. HML's are like other loans, except their criteria is usually less stringent (but the deal still has to make sense) Interest rates are higher, and points charged are higher. For a deal to make sense using HML's there needs to be a very healthy profit margin, and the person borrowing needs to have something to add value if they are lacking in an area. For instance, if your credit is bad but you have a solid track record, etc. Rates and terms are in relation to risk.

I don't know what you mean by helping and supervising the deal, you would need to explain that one. A HML is a lender, not a partner.

The money can be based on the property and DSCR rather than the individual, but it will cost more and you'll need to put more skin in the game.

The HML I found: terms are 4 pt + 12%, will do 100% Purchase + 100% Rehab - 50% equity or backend points. This I think is the best I can do since I have no skin to put in yet!

The deal I am looking to do will yield a minimum profit of $36,000.  Remember this is my first deal and I have no money and no experience.

Peggy - you just need to make sure your numbers are realistic and there is plenty of headroom in the deal. "Minimum profit" should be based on a selling price after the rehab that is conservative (ie - a little below market) and make sure you consider holding costs and realtor fees if you are using one. Make sure your sales comps are solid and your rehab estimate is good. These are your biggest risks as a newbie. If the house will not appraise for the ARV or you used the wrong comps, you could find yourself having a hard time selling. If the rehab is underestimated also, you lose your margin quickly. Both of those things together could cause you to lose money, but if you have done your homework, hopefully the $36k spread is enough to cover for minor miscalculations.

Also, my HML held the rehab money in escrow and only paid me as the work was done (I had to come up with initial deposit money for contractor to start out of pocket - generally 1/3 or 1/2 of the rehab estimate). Make sure you are clear on how that works with your HML. I wish you success in your first flip!

In Los Angeles, 12% + 4 points is just slightly high but not unbelievable, @Peggy Ann Thrower . Paying interest + Points + 50% profit is way too much and you'll likely find you make nothing on the deal. With margins dropping, it's hard for me to believe that anyone still asks for a cut of the profit, and I'm not sure how successful this strategy ever was. Nor, do I understand your comment about supervision.

If you borrow the rehab money, many/most lenders will want too look at your progress as they release additional construction funds, but that should be the extent of any "supervision." I don't know what you've been told beyond this.

There are many lenders, large and small out there and the easiest way to find many at a time is to attend a few local real estate clubs. Go to Terms will be all over the map but, with your background, you might have a hard time finding anyone willing to loan to you at sensible rates. If you have no money and no experience, all you have is the house (and it is under contract, yes?). At worst you could wholesale the deal and make a few bucks.

As a newbie, with no experience, your best bet might be to find an experienced partner. Don't try to do your first deal on your own with a silent 50% "supervisor." There's a lot of money and unused knowledge out there now, but few viable deals.  Two years ago, with many available properties, no one would need you. Now, you might be able to split the profits.

In this case, you and your partner will work for their share 50/50, not the lender, who won't. The right partner brings credibility, some cash, knowledge hopefully he or she is willing to share, and expands your chances of getting a reasonable loan and making a profit greater than just a wholesaling fee.

Good luck, Peggy.

Jeff S Na , I've been meaning to ask, what does the points in x% + y points mean?


Peggy, my experience with HML is that they NEVER have been involved in anything but writing a check after they vet the deal to make sure that it is a good deal. The gap funder should be a bit closer to the deal, but not supervising and helping, unless you specifically are asking for the help. Typically they both are just the money partners and not the rehab partners.

I have worked with MOR Financial and Center Street Lending as HML and they both are good to work with and don't interfere with the rehabbing, other than to check that the rehab is being done on time.

PM me if you have any questions or problems with the flip. I'm here in LA, too, and would be happy to lend a bit of help if you need it.

@Bram Spiero - x% is the interest rate (APR) on the borrowed funds. Y points is the upfront cost of the loan (can be called origination fee or pre-paid interest). So on a 100k loan with 12% and 4 points, you'd pay 4k up front at closing and then 1% interest per month (12% / 12 months). These loans are interest only and have terms of 3-6 months typically.

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