How "Hard" is it to get Hard Money for a flip?

22 Replies

Hi,

I was curious what the process is, and what possible pitfalls there are for someone, particularly a beginner, to obtain hard money for a flip? ty!

Originally posted by @Jake K. :

Hi,

I was curious what the process is, and what possible pitfalls there are for someone, particularly a beginner, to obtain hard money for a flip? ty!

The "hard" nomenclature is not to imply it's hard to obtain, but rather, think: hard to pay off

ie. You'd better get your sums right, to make sure that the deal you're buying is a real "deal"!

ie. Otherwise, the interest rate / points can eat you alive!

For example: Do you fancy your credit being ruined, if/when you default?

And/or: Do you fancy your HML foreclosing on the property you bought?

And please, if they advertise themselves as "private lenders" - don't believe them! My 2c...

Originally posted by @Brent Coombs :
Originally posted by @Jake K.:

Hi,

I was curious what the process is, and what possible pitfalls there are for someone, particularly a beginner, to obtain hard money for a flip? ty!

The "hard" nomenclature is not to imply it's hard to obtain, but rather, think: hard to pay off

ie. You'd better get your sums right, to make sure that the deal you're buying is a real "deal"!

ie. Otherwise, the interest rate / points can eat you alive!

For example: Do you fancy your credit being ruined, if/when you default?

And/or: Do you fancy your HML foreclosing on the property you bought?

And please, if they advertise themselves as "private lenders" - don't believe them! My 2c...

Ty for the advice Brent!  When you mention credit being ruined, I thought Hard money is when the house is used as the collateral and not your personal credit?

@jake k. 

There is still a charge on the house and if it goes to forclosure, it rests on you. Avoid hard money or private (all the same to me” unless you have a true exit strategy. IMO that strategy shouldn’t last longer that one year and you best be sure you can handle to load. 

Originally posted by @Jason D. Lewis :

@jake k. 

There is still a charge on the house and if it goes to forclosure, it rests on you. Avoid hard money or private (all the same to me” unless you have a true exit strategy. IMO that strategy shouldn’t last longer that one year and you best be sure you can handle to load. 

Definitely makes sense, its a higher risk form of funding forsure, but seems like a good option for someone who doesnt want to rely on their own credit and does have an exit strat

Originally posted by @Jake K. :
Originally posted by @Jason D. Lewis:

@jake k. 

There is still a charge on the house and if it goes to forclosure, it rests on you. Avoid hard money or private (all the same to me” unless you have a true exit strategy. IMO that strategy shouldn’t last longer that one year and you best be sure you can handle to load. 

Definitely makes sense, its a higher risk form of funding forsure, but seems like a good option for someone who doesnt want to rely on their own credit and does have an exit strat

A lender is going to look at the quality of the deal and how much skin YOU put in the game. It really doesn't matter if you can find private funds (friends, family, etc) or a HML. Your post bothers me in the respect that you don't have an exit strategy. I ask my borrowers how they intend to pay off the loan. The last thing a lender wants to do is foreclose no matter if they are conventional, private, or HM lenders. Typically I write my loans for one year and they are to flippers.

Originally posted by @Jake K. :
Originally posted by @Jason D. Lewis:

@jake k. 

There is still a charge on the house and if it goes to forclosure, it rests on you. Avoid hard money or private (all the same to me” unless you have a true exit strategy. IMO that strategy shouldn’t last longer that one year and you best be sure you can handle to load. 

Definitely makes sense, its a higher risk form of funding forsure, but seems like a good option for someone who doesnt want to rely on their own credit and does have an exit strat

 Your credit is on the line with hard money loans just like other loans.  The lender will foreclose on the house if you don't pay, but the foreclosure will also be on your credit report.

Originally posted by @John Thedford :
Originally posted by @Jake K.:
Originally posted by @Jason D. Lewis:

@jake k. 

There is still a charge on the house and if it goes to forclosure, it rests on you. Avoid hard money or private (all the same to me” unless you have a true exit strategy. IMO that strategy shouldn’t last longer that one year and you best be sure you can handle to load. 

Definitely makes sense, its a higher risk form of funding forsure, but seems like a good option for someone who doesnt want to rely on their own credit and does have an exit strat

A lender is going to look at the quality of the deal and how much skin YOU put in the game. It really doesn't matter if you can find private funds (friends, family, etc) or a HML. Your post bothers me in the respect that you don't have an exit strategy. I ask my borrowers how they intend to pay off the loan. The last thing a lender wants to do is foreclose no matter if they are conventional, private, or HM lenders. Typically I write my loans for one year and they are to flippers.

I was saying it seems like a good option for someone who DOES have an exit strategy, in other words, for example: they have a buyer set up already

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@Jake K. Hi Jake,

Hard money loans are not that difficult to secure, but they will require skin in the game as someone had mentioned earlier. This type of financing is best used for distressed real estate (i.e. fixer) with equity in the deal (a good deal will make up for the financing cost - usually 8-12% and then some). 

Keep in mind, these loans also come with origination fees anywhere around 1-3% of the loan amount. Since these loans are short term in nature, almost all are interest only payments. If you have a buyer lined up to payoff the lender as an exit strategy, this could be a good deal for you.. just keep in mind the fees and see if there are any pre-payment penalties if you intend to hold it for a short amount of time.

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Originally posted by @Eric Loya :

@Jake K. Hi Jake,

Hard money loans are not that difficult to secure, but they will require skin in the game as someone had mentioned earlier. This type of financing is best used for distressed real estate (i.e. fixer) with equity in the deal (a good deal will make up for the financing cost - usually 8-12% and then some). 

Keep in mind, these loans also come with origination fees anywhere around 1-3% of the loan amount. Since these loans are short term in nature, almost all are interest only payments. If you have a buyer lined up to payoff the lender as an exit strategy, this could be a good deal for you.. just keep in mind the fees and see if there are any pre-payment penalties if you intend to hold it for a short amount of time.

  

ty for this info!

Hard money is easy to get if you have a good deal and have some cash to put down. It's no less risky than a conventional bank.... If you don't make payments, they forclose on you. I actually feel it is a little less risky, because these are usually lenders that have done this for a while and know what a good deal looks like. They make more money if you succeed than if you fail, so they do more due diligence than a traditional bank does. Traditional banks know nothing of rehab costs or ARV, where hard money lenders take this all into consideration when approving a deal.
Originally posted by @John Thedford :
Originally posted by @Jake K.:
Originally posted by @Jason D. Lewis:

@jake k. 

There is still a charge on the house and if it goes to forclosure, it rests on you. Avoid hard money or private (all the same to me” unless you have a true exit strategy. IMO that strategy shouldn’t last longer that one year and you best be sure you can handle to load. 

Definitely makes sense, its a higher risk form of funding forsure, but seems like a good option for someone who doesnt want to rely on their own credit and does have an exit strat

A lender is going to look at the quality of the deal and how much skin YOU put in the game. It really doesn't matter if you can find private funds (friends, family, etc) or a HML. Your post bothers me in the respect that you don't have an exit strategy. I ask my borrowers how they intend to pay off the loan. The last thing a lender wants to do is foreclose no matter if they are conventional, private, or HM lenders. Typically I write my loans for one year and they are to flippers.

 Why do people loan money when they get less than 12% or less return

Or am I not understanding it.  Can they get 20% or more

So many houses to flip with cash which pay much more than that

Originally posted by @Michael Plante :
Originally posted by @John Thedford:
Originally posted by @Jake K.:
Originally posted by @Jason D. Lewis:

@jake k. 

There is still a charge on the house and if it goes to forclosure, it rests on you. Avoid hard money or private (all the same to me” unless you have a true exit strategy. IMO that strategy shouldn’t last longer that one year and you best be sure you can handle to load. 

Definitely makes sense, its a higher risk form of funding forsure, but seems like a good option for someone who doesnt want to rely on their own credit and does have an exit strat

A lender is going to look at the quality of the deal and how much skin YOU put in the game. It really doesn't matter if you can find private funds (friends, family, etc) or a HML. Your post bothers me in the respect that you don't have an exit strategy. I ask my borrowers how they intend to pay off the loan. The last thing a lender wants to do is foreclose no matter if they are conventional, private, or HM lenders. Typically I write my loans for one year and they are to flippers.

 Why do people loan money when they get less than 12% or less return

Or am I not understanding it.  Can they get 20% or more

So many houses to flip with cash which pay much more than that

 My loans generate well over 12%. On top of that I do my lending with my 401k which means all interest income is tax-deferred. I am not interested in being a flipper.  I do by and holds but do that outside of my 401k and live off of the income streams. Lending the money is an easy way to make a great profit and I do not have to get out and search for deals etc. Borrowers find me.

You mentioned you thought with Hard Money the property is the only security. With all Hard Money loans I’ve seen the borrower has a personal guarantee. I do also see non-recourse frequently (no personal guarantee) but only on very large commercial deals and even then only a portion of those notes are non-recourse most of the time.

Applying to a hard money or private lender is actually a good way to confirm that your numbers are good - because most of them will really scrutinize your deal and tell you if it's solid or not.  Since you're new @Jake K. , that would be very good for you. 

As far as foreclosure - in my experience, most private lenders don't ever put themselves in a position where they'll have to foreclose to get their money back. They require that when you close on the house you're going to flip using their funds, they get a deed from you, signing the house over to them. Then if you disappear or mess up the deal, they just go record it if they need to take possession.  Most hard money lenders do not strictly speaking have a mortgage on your house - they just have a promissory note secured by your house.

Jake, I know from seeing you on here that you're new and looking to get rocking and rolling in real estate. If I were you, I'd look at your local REIA for an experienced person who would mentor you a bit -let you do some deals with them where you do a lot of the work for a small piece of the profit. If that interests you, ask the officers of the REIA if they know any members who would take you on.

Originally posted by @Gail Greenberg :

Applying to a hard money or private lender is actually a good way to confirm that your numbers are good - because most of them will really scrutinize your deal and tell you if it's solid or not.  Since you're new @Jake K. , that would be very good for you. 

As far as foreclosure - in my experience, most private lenders don't ever put themselves in a position where they'll have to foreclose to get their money back. They require that when you close on the house you're going to flip using their funds, they get a deed from you, signing the house over to them. Then if you disappear or mess up the deal, they just go record it if they need to take possession.  Most hard money lenders do not strictly speaking have a mortgage on your house - they just have a promissory note secured by your house.

Jake, I know from seeing you on here that you're new and looking to get rocking and rolling in real estate. If I were you, I'd look at your local REIA for an experienced person who would mentor you a bit -let you do some deals with them where you do a lot of the work for a small piece of the profit. If that interests you, ask the officers of the REIA if they know any members who would take you on.

That is news to me. I always take a 1st. I know other HML that take 1st position as well. Promissory notes are only as good as the person agreeing to pay them.

@Gail Greenberg I don't know any HML or private lender that doesn't record a security instrument (deed or mortgage) against an asset they are lending on.

This is a semantical debate.I said a note secured by the property plus a signed deed ready to be recorded. There are many ways to tie the loan to the property.

Your question is vague, @Jake K. , and sort of an inkblot test for private lending. You're getting everyone's narrow interpretations, which are all over the map. Perhaps that's what you wanted. You even attracted some that have a bug up their butt that private/hard money lenders actually exist.

Not all lenders require skin in the game. There is a huge amount of 100% financing out there now if you look. This is especially true if you are experienced and have a good deal. Asking someone to fund 100% of a deal when you haven't proven yourself, however, could be extremely challenging. If you have a good deal, I suggest you find an experienced partner first. Real estate clubs are a good place to find all of these.

Unlike the conventional lenders, very few private/Hard Money lenders report to the credit bureaus. It's obviously a question for each specific lender. Taking out a private/hard money loan will generally not damage your credit any more than it will enable you to build it.

"As far as foreclosure - in my experience, most private lenders don't ever put themselves in a position where they'll have to foreclose to get their money back. They require that when you close on the house you're going to flip using their funds, they get a deed from you, signing the house over to them. Then if you disappear or mess up the deal, they just go record it if they need to take possession. Most hard money lenders do not strictly speaking have a mortgage on your house - they just have a promissory note secured by your house."

Not semantics but a quote. You seem to have confused the security afforded by a Mortgage or Deed-of-Trust with a Deed-in-Lieu, @Gail Greenberg . Unless the note is tied to a recorded Mortage or Deed-of-Trust (state dependent), then the loan is completely unsecured. A deed-in-lieu allows a lender to take over the property without going thru the foreclosure process and is not a security interest in the property.

Not that some lenders won't ask for one, but a pre-signed deed-in-lieu is generally unenforceable if the borrower contests it. If challenged, there's not a judge in the world that would accept a pre-signed DIL, because you're asking the borrower to waive their foreclosure rights in advance. Plus, good luck using an unsecured note alone if the borrower declares bankruptcy and the BK trustee claws back the property. To declare yourself a secured lender you must also have a mortgage or DOT.

I know there are lenders who ask their borrowers to pre-sign a DIL, but they will also require a mortgage or DOT. No knowledgeable lender would trade the security of a recorded Mortgage or Deed-of-Trust for a pre-signed Deed-in-Lieu. This is about as safe as loaning on a handshake.

"Applying to a hard money or private lender is actually a good way to confirm that your numbers are good - because most of them will really scrutinize your deal and tell you if it's solid or not. Since you're new @Jake K. , that would be very good for you."

Solid advice, Gail.

I bow to the superior wisdom of the hard money lenders on here. I merely describe the paperwork I've been presented with when I was a flipper which, thank goodness, I am no longer. I shouldn't have generalized it to all lenders. 

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