Hard Money: a comprehensive DO's and DON'Ts needed

15 Replies

BPers,

I searched the forums for a list of do's and don'ts for hard money lending without much luck so I'm going to see if I can get all the answers in one place. I am at a point in my REI where all my personal and private money is tied up in equity or stuck in a seasoning period. I want to scale my business with a goal of at least 10 new properties in 2018. The only way to reach this goal is to enlist the help of HM lenders. I get the basics of needing them for the rehab period but what I don't know are the details and what I should be looking for and avoiding. If I'm correct, most get HML's and only pay the interest accrued monthly, but I've also read that some are able to defer all principal and interest payments until the loan is paid back. Some give 100% to buy the house and rehab while others give a percentage. How many points is standard? If i pay for points is that a transaction cost or is that part of the loan somehow? Is the interest based on the deal being funded, my experience, or my credit report? What are the main points I should to compare between lenders? Local or National brand? .... and so on and so on. Those of you who have extensive experience please help us fellow novices from getting taken advantage of.

As and example, the deal I'm currently working on (in Houston, Texas) is a 4-plex of 1 br 1 bths that I'm buying for ~50K. 60K in rehab with an ARV of $175K to 200K (no comps in the area). My credit is in the low 800s. I've got 2 SFH financed, 1 condo free and clear, and 1 SFH in the rehab stage of a BRRRR aside from my financed primary. Oh and I still work a W2.

I'd like to keep this thread educational so please refrain from trying to pitch your services!  Thanks in advance for your help. 

Huy,

HML are as varied as the folks that own them. Trying to categorize them is like herding cats. Some generalizations:

1) They are expensive money. Interest rates vary, but it will most likely be north of 10% unless you have established relationships. Plan on at least 2 points, could be 5 or more. Some will lend up to 90% ARV, some only 60%. Some will give you x% for purchase and 100% of rehab. In the end, it will come out that if they have to take the property back, they will make money (or break even). Plan on paying for everything up front, and not financing in points, fees etc. Some might let you do that, most that I know won't.

2) HML are about getting the deal done. They want you to be successful. If you are successful, then they are making money. That being said, they will protect themselves completely. Think deed in lieu, additional collateral, cross collateralization, and lots-'o-cash on the table.

3) The best HML tend to be local, and want to know you. Not as in get the families together know you (although that might happen), more as in what kind of character do you have. If you say something, can you back it up? Can you perform as advertised? Nationals can have better pricing, but lack a certain amount of flexibility that the locals have. This depends on how the HML is set up and funded. The more deals you do (the better the HML gets to know you), the more flexibility and better (to a certain extent) terms you will get.

4) Your entire plan must be water tight. Like seriously water tight. Like beaver butt water tight. You should have multiple exit strategies BEFORE you even think about engaging a HML. If you only have one exit strategy, DO NOT USE AN HML. Come up with another viable exit strategy. Make sure your numbers are REALISTIC AND PERFECT, no pie-in-the sky stuff. The deal should be KILLER AWESOME. HMLs are all business, and you need to know their business as well, if not better, than your own.

5) Hire your own attorney to advise you on the HML paperwork. Seriously, this is the big time, so start acting like it. Trust me when I say the HML has at least one attorney on speed dial, if it's not owned by one. Usually they have legions of them. Get your own, you'll need it anyway. Oh, and make it one that knows corporate stuff, HML, Mortgages, Lending, Usury Rules, Notes (NPN, PN, RPN, FC, DIL) etc. inside out.

6) Set up an LLC, S or C corp. Use an attorney, do't go all cheap, and you'll need to have the opinion letter anyway. Typically HML won't lend to a person, only a company. So, better to set one up now, 'cause expedited filing fees are expensive. If you go to an HML without one, you look like you just fell of the turnip truck. If you are uncertain about setting up corporate shop, you aren't ready for a HML.

7) Comparison shop - HMLs are all over. Establish relationships with a few of them and ship them deals. See what they come back with.  Work them against each other (professionally, please) and see what pops out. The more you look like you are all business, the more they will respect you. 

8) KNOW YOUR STUFF (your choice of "S"). If you are at all queasy, uncertain or confused about 1 - 7 above, you aren't ready for an HML. GO DO MORE HOMEWORK.

I'm sure that I have left something out here... but this is about all I can think of at the moment.

HML's have their place, but you MUST be on top of your game, because they know your game and their game better than you do. It's advisable you do the same.

Good Luck!

Jim

Huy,

You're certainly asking a lot of good questions, but as James C  stated "trying to categorize them is like herding cats" they are all over the place with regards to how they lend their funds. 

Have you considered a private lender? A loan from a private individual, rather than from a organized lending company which is where I would categorize an HML. A private lender would be more in line with your "uncle Bob", "best friend Steve", or "neighbor across the street". Private lenders generally tend to be a little more flexible with their lending practices, thus easier to work with.

As long as your deal makes $ense, you should have no problem finding someone to fund your upcoming projects. 

Providing your 4-plex numbers above are accurate, I foresee you having no problem in getting that deal funded. 

I've been using hard money since the first year I started investing in buy and hold about 9 or 10 years ago.

And the first responder was right on the money with his outline.

That being said, here is what i think you can find in terms of numbers. 
Points - typically 3 to 5.  If you can find someone at 4pts or better, you're doing fine.
LTC: Many hml's will do 90% purchase and 100% rehab. A few will do 100% of both purchase and rehab once you get a few deals under your belt with them. If you can find someone do 90purchase and 100rehab, you're doing fine.
ARV: I typically see 70% ARV for most hard money lenders. 75% is rare but some do it. If you find 70% ARV, you're doing fine.

Rate: 12 to 15% is typical.  I'd look for someone around 12 to 14%. If you find that, you're doing good.
Fees - Here's where they get tricky. Some have a bunch of fees tacked on as well and thats where you could be getting gouged and want to get a sense. Most require appraisal and survey and a doc fee. Appraisal should be 500 or less. Survey is typically you hiring your own surveyor so that is easy to control. And doc fee - no more than 500 or so?

Ultimately, thats the key. If you find a hard money lender that has lending terms somewhere in those windows, you should be fine and should move forward.  Be extremely leery of any hard money lender that asks for a ton of money up front. Appraisal, survey and a doc fee are about all you should get hit with. If they ask for points up front, tell them to take a hike and move on.

You'll eventually find one that is reasonably priced, good terms, flexible and always closes. When you do, stick with them and you'd be surprised how much easier it is to scale your growth.

I now have 66 houses and used hard money loans on almost every single one.

@Mike H. The HML points should be rolled into the loan rather than paid up front correct?

Thank you all for taking the time to read my thread and comment!

This makes sense as to why I can't find a cookie cutter answer as I could with say a conventional loan. @james C. I do have a Series LLC in place. I'll can use the same attorney to begin looking at my deals to make sure someone is acting in my best interest. Great advise and something most overlook.

@Theodore- I've used private lenders (family) but prefer to work with a HML so they aren't calling daily asking how their investment is going etc. While private money is always better because of the low or no rates/fees.. they aren't without their own stresses and headaches. For my calculations, I have learned to lowball everything. That way I'm almost looking at a worst case scenario. Anything better is just a bonus!

@Mike I want to be where you are with 66 houses so it sounds like I'm moving in the right direction with HMLs. I guess the next step is to reach out to a plethora of lenders and start a spreadsheet to compare deals. 

one thing I forgot to ask is how quickly does this process happen? On a conventional loan, I get preapproved then go house hunting. Obviously, that isn't the case here so how long does it generally take to have cash in hand to begin?

Originally posted by @Mike H. :

I've been using hard money since the first year I started investing in buy and hold about 9 or 10 years ago.

And the first responder was right on the money with his outline.

That being said, here is what i think you can find in terms of numbers. 
Points - typically 3 to 5.  If you can find someone at 4pts or better, you're doing fine.
LTC: Many hml's will do 90% purchase and 100% rehab. A few will do 100% of both purchase and rehab once you get a few deals under your belt with them. If you can find someone do 90purchase and 100rehab, you're doing fine.
ARV: I typically see 70% ARV for most hard money lenders. 75% is rare but some do it. If you find 70% ARV, you're doing fine.

Rate: 12 to 15% is typical.  I'd look for someone around 12 to 14%. If you find that, you're doing good.
Fees - Here's where they get tricky. Some have a bunch of fees tacked on as well and thats where you could be getting gouged and want to get a sense. Most require appraisal and survey and a doc fee. Appraisal should be 500 or less. Survey is typically you hiring your own surveyor so that is easy to control. And doc fee - no more than 500 or so?

Ultimately, thats the key. If you find a hard money lender that has lending terms somewhere in those windows, you should be fine and should move forward.  Be extremely leery of any hard money lender that asks for a ton of money up front. Appraisal, survey and a doc fee are about all you should get hit with. If they ask for points up front, tell them to take a hike and move on.

You'll eventually find one that is reasonably priced, good terms, flexible and always closes. When you do, stick with them and you'd be surprised how much easier it is to scale your growth.

I now have 66 houses and used hard money loans on almost every single one.

This is pretty good advice although I'll say the days of regularly seeing 14-15% and 4-5 points are pretty much behind us. More common in today's world is 9-12% and 2-3 points.

Anthony Palmiotto, Lender
732-825-8095

Hmmm. I'm at 12 and 4 pts. I think someone needs to go back to their HML and renegotiate.
The only trick is my HML does 100% purchase and 100% rehab for me and I don't have to do appraisals or surveys. So maybe 12 and 4 isn't too bad.

Huy,

Cash in hand again depends on the HML and your relationship. I've see them where essentially you have a line of credit, so it's instantaneous. If it's a first deal, then 10 days is a good target. Average would be 4 to 5 days. This is all pending good title, and simple buys/rehabs.

More complex transactions (think Notes (NPN, PN, RPN, etc. ) blanket/portfolio deals and non-local stuff take a bit longer.

Jim

I charge 12% and 4 points and roll them into the loan. This gives the borrower more cash at closing. My M/O is no credit check, no application fee, and no appraisal. So far, so good but might be creating a time bomb. I am working hard to be a better HML to protect myself and my funds.

@Jay Hinrichs has proposed the 3C's for lending:
1. character of the borrower
2. collateral
3. capacity to repay

This sounds like common sense to protect your funds and is one of the reasons why he has grown so successful. Real estate has a lot of land mines..and it makes no sense to plant more of them. Any new customers I take on now will at least have to provide a desktop appraisal for consideration. In the grand scheme, that is inexpensive and the value a HML brings is FAST money without 100 pages of docs, etc.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

I do 15% and no points

In the past when i've used hard money I paid 12% and 2points. That was 85% LTV and 100% of construction.

What ive been doing lately is raising private money from investors for the down payment and then securing traditional bank financing for the acquistion and construction loan. Ill pay the investors a 6-8% return with some sort of equity split at the sale. 

For Texas look at Visio in Austin they are pretty active right now.  Lima one  Lending home does texas.

credit score is OK but not the driver to HML IE you need one and need it to be in the mid to high 600's but after that its not like dealing with a bank were FICO is a driver. experience and equity are the drivers.

Hey @Huy Thai great questions and mostly fully answered already. You can see that there are a few MAIN points to focus on, rest is variable based on your location, experience and finances.

1.) Rates depend on the strength of the project and the experience of the Borrower. So if you are comparing two lenders at two different LTVs, the higher LTV is more risky and therefore more expensive. Same with experience. Lenders want to be protected by good deals and good borrowers. Rates maybe higher for inexperienced borrowers. The location of the property also affects rates. In California rates go as low as 7%!! This is because the market is so competitive. You can see other responses say 12% is normal - I haven’t seen a 12% deal in CA in 3 years.

2.) Given those location, deal strength and experience factors - it really comes down to relationship with lenders. It’s worth paying MORE for lenders that know what they’re doing. Go with reputable lenders that industry colleagues recommend. You want lenders to work with you on rates as your bring them more deals.

3.) Just never pay anything out of pocket - points and fees are taken from the proceeds of the loan funding. Ask for ALL junk fees, it should total under $1000. And go with DIRECT lenders as they will be the most experienced and FASTEST, which is very helpful in the competitive industry of RE Investing

Remember, Lenders are ON THE SAME SIDE as you, they don’t want to lose their money, and I assume you don’t want to lose money either. So their experienced underwriting opinions can prove to be very valuable.

Best of luck!!

DO

  1. Do start looking for money now, @Huy Thai . Yesterday would have been better. This is a business based on personal relationships. Real estate clubs are a good place to start because you can get an initial impression of each other face-to-face without the pressures of doing a deal.
  2. Do look for money as aggressively as you look for properties.
  3. Do meet and get to know your lenders, as well as their lending criteria. We never do business with anyone we've never met and have gotten to know at least a little and I suggest you do the same.
  4. Do know and be able to defend your numbers on any property. Most lenders will (really must) do an independent evaluation anyway and should be happy to share their opinion and often their spreadsheet.
  5. Do take heed if an experienced lender shows you why you have a lousy deal. 
  6. Do borrow as locally as you can. Forget web-based sellers of lender lists, most/all of which are scams, and multi-state far away lenders, who likely have no understanding of you or your area and might not be sympathetic to any problems you might have after you’ve borrowed the money.
  7. Do prepare a list of questions for your prospective lender. Here are a few posts that could help here:  Questions for Hard Money Lenders,   How to Vet a Private Lender,   Due Diligence on Private Lenders
  8. Do obtain independent references and referrals from other borrowers as best you can, understanding that borrowers often hold their best lenders as close to the vest as they can.
  9. Do maintain a stable of lenders you can pick and choose from as your properties, and their lending criteria, fit.
  10. I don’t care how big they seem, until they’ve proven themselves 110% reliable, do make sure your lender has the cash available to lend. If they say they have to rely on an investor to fund, or another deal to close before they have the cash, then pass.
  11. Do read and understand at least their note in advance of signing it and ask questions.
  12. When it comes time to repay, do check all closing calculations. Most people are honest but everyone can make a mistake. It astonishes me how few borrowers do this.
  13. Do what you say, show up on time, return all calls, and pay all bills when due. Did I really have to say this?

DON'T

  1. Don’t agree to pay any up-front fees. If legit (most are junk fees) these should be paid at closing when your lender performs. Appraisal costs paid directly to an appraiser, and perhaps a nominal credit check fee, are the only exception.
  2. Don’t overpay for a property, compromise your expected returns, or ever feel desperate to do a deal. Similarly, don't subscribe to the myth that if you find a great deal, the money will somehow appear. This is the stuff pedaled by gurus.
  3. Don't think the numbers don't apply to you or that they will somehow work out. You are not exempt from losing money. The first time you sell a property and have to bring a check to the closing, you'll understand this.
  4. Similarly, don’t ask a lender to loan on a substandard deal because you’re either having a hard time finding properties or want to take an unusual risk.
  5. Unless you’re just asking for some friendly advice or info, don’t present deals you do not have under contract. The cold reality is many deals you believe you’re 100% certain to obtain will often fall through.
  6. Even though many sellers (naively) request them, don’t rely on proof-of-fund letters as any kind of evidence your lender will perform at closing.  Yesterday’s ample bank account could be empty tomorrow. This is a business where actions speak louder than words -- and bank statements.
  7. Don’t do business with friends or family. Losing their money will make for many uncomfortable Thanksgivings.
  8. Don’t play games. If you agree to do a deal, do it, and expect nothing less from your lender.

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