Conventional to Hard Money Lenders - What's in between?

[Steve Buchanan]

On one end of the spectrum you have conventional lenders looking to lend to qualified buyers at low single digit rates for long term loans. These loans generally do not come with construction financing (I say generally because I know there are products such as the FHA 203K that will fund some rehabbing) and don't generally work on distressed properties. They are not a valid funding source for fix and flippers.

On the other end of the spectrum you have hard money lenders who look to fund even unqualified buyers as long as the deal checks out. These loans are short term, get you money quick and will fund much of the acquisition and rehab with very little down but command much higher interest rates and points (in New Jersey I'm being quoted 12%-15% with 3-5 points). They are a very common source of funding for flippers.

My question is what type of lenders fall in between (besides private money!)? 

I currently have a deal in contract for which I have the funds to purchase and rehab myself but I don't want most of my money tied up in one deal. I also don't see a point in borrowing money I already have at 12%-15% plus points. My personal financial situation is sound and I have good credit. Is there a type of lender out there that lends in the mid to high single digits, on a short time frame and lends on construction to qualified buyers with good income and assets to come after as recourse if things went bad?

[Jon Holdman]

What you're looking for is a construction loan from a bank.  Unfortunately they're very hard to find.  Try smaller banks or credit unions in the area of the property.

[Matt Faircloth]

Hey Steve,

I have two thoughts for you...

@Jon Holdman I agree with you - I've had luck getting construction financing from local, small community banks.  Make sure they are close to the deal geographically.  They will want a depository relationship as well.  I have a few lenders in Central New Jersey I can recommend also.  They take a while to close but can get the deal done.

Why not private money? I have negotiated deals with private money lenders in the 8 to 10% range that are win win for both parties. I'm sure there is someone in your network that either owns real estate free and clear, has an IRA that is not performing well, or has some extra cash they would love to invest in real estate if they only had the time. I do most of my fix and flips or buy fix and refinance deals with private money up front and bank financing on the back.

I hope that helps!

Matt

[Account Closed]

Like the two others mentioned, look at smaller banks in your area. A portfolio lender like this, a bank that holds and services the loan, would be in between conventional and hard money. You may have to make a few calls talking to their commercial loan people before you find someone that fits your nice.

[Erik Pedersen]

@Account Closed 

If you pursue these avenues let me know how it goes Im very interested to hear.  Your planning on buying, fixing up, and holding correct?  I am looking to do exactly this when we get our HEL or refinance done on my newest property.  

[Account Closed]

A construction loan at a small commercial or community bank would be a lot different than conventional. The programs vary. I have seen a lender do 90% financing before on a  purchase + rehab. I think it depends on the bank, their program and the deal you bring to them. Not everyone does flip/rehab loans. And those small banks that do all have their own program that can vary a little. You just have to call and ask around.

One common form this can take: you bring a PSA and a rehab estimate. This estimate looks like a construction loan build sheet with line items for different items. This goes for an "as-built" appraisal (that you pay for of course) showing the estimated value on completion. The bank lends a portion, say 75%, of that estimated appraisal at completion. The money is usually sent in chunks. The first portion could fund your purchase at 100 percent. The other pieces are usually paid out as you do the work. You generally have to pay for inspections, like a construction loan. Depending on how you buy materials/pay contractors there could be money out of your pocket while you wait for the funding portions to catch up with your expenditures. The bank's funding stops when you draw the promised amount (say 75% of appraisal). Cost overruns would be up to you at that point.

If the appraisal is right, and you buy right, you can see how you could do this deal with little money out of your pocket. Depends on the costs to buy, rehab and the appraised amount.

I work as a commercial lender at a small commercial bank and have seen these deals done a variety of ways.

[Jassem A.]

You could get a conventional mortgage and live in the property for a year and put 0-5% down or if you have property assets, you could use them as collateral on a commercial loan or line of credit or a standard HELOC.

My credit is only fair and I thought I would not qualify for another HELOC because of lack of reserves and DTI but I recently found a local credit union that approved me for a commercial loan using property as collateral. Basically a 5/1 ARM with 4.75% interest, 15 year term, and 1% origination. No appraisal needed but property has to cash flow.

[Steve Buchanan]

Thanks everyone for the responses.

I'm going to try to talk to some local banks next week and see what they have to say. 

One lender I've spoken to will lend on distressed properties at 70% LTV for 7.5% 3-5 year term with 1 point prepayment penalty . They won't fund rehab but at the moment I don't mind using my money for that. I'll keep looking for better options though.

@Erik Pedersen I'll keep you posted on my findings. I'm looking to fix and flip though, not buy and hold. 

[Don Coumbs]

@Steve Buchanan , I recently did a buy-fix-hold where I bought and rehabbed with my own money and then refinanced for a regular mortgage.  Because I already had more than four mortgages I couldn't do a cash out, only a return of the purchase price and then only because the purchase price was less than 70% of the rehabbed value.  Also, the refinance had to happen within 6 months of the purchase. 

Could be that is an option for you.  For me, it kept my finance costs low and enabled me to make my money available for the next deal.

I got that loan through a mortgage broker.  I had called the small banks and credit unions in the phone book with no luck, but then I found two brokers who would do it.

[Albert Bui]

That is correct @Don Coumbs I believe what you just described is a DFE or delayed financing exception you can cash out up to 70% when you have 1-4 financed properties and the loan to value is reduced to 65% when its 5-10 financed properties so be careful to watch that and your fico (720 min when 5+ financed properties) and reserve requirements (6 months for each fin prop when 5+).

I have also networked with local lenders that will lend up to 75% of market value with no restriction for local properties. These "in between," lenders or portfolio/commercial lenders will be the bridge in between conventional and hard money lending.

I intend to use conventional loans as much as possible since the terms and rates are the best overall, second are portfolio loans, then lastly hard money and private money has their place for acquisition/rehab as well.

[Albert Bui]

Originally posted by @Account Closed:

A construction loan at a small commercial or community bank would be a lot different than conventional. The programs vary. I have seen a lender do 90% financing before on a  purchase + rehab. I think it depends on the bank, their program and the deal you bring to them. Not everyone does flip/rehab loans. And those small banks that do all have their own program that can vary a little. You just have to call and ask around.

One common form this can take: you bring a PSA and a rehab estimate. This estimate looks like a construction loan build sheet with line items for different items. This goes for an "as-built" appraisal (that you pay for of course) showing the estimated value on completion. The bank lends a portion, say 75%, of that estimated appraisal at completion. The money is usually sent in chunks. The first portion could fund your purchase at 100 percent. The other pieces are usually paid out as you do the work. You generally have to pay for inspections, like a construction loan. Depending on how you buy materials/pay contractors there could be money out of your pocket while you wait for the funding portions to catch up with your expenditures. The bank's funding stops when you draw the promised amount (say 75% of appraisal). Cost overruns would be up to you at that point.

If the appraisal is right, and you buy right, you can see how you could do this deal with little money out of your pocket. Depends on the costs to buy, rehab and the appraised amount.

I work as a commercial lender at a small commercial bank and have seen these deals done a variety of ways.

HI Matt will your bank lend in this manner 75% of ARV (after repair value) or ACV (after construction value) up to 90% of project cost (acquisition & rehab/construction) ?

If so there are many projects to be had soon.