Hard Money question (I dont want to get ripped off)
Antelope, CA · Member since 2012 · 23 posts · 1 vote
Hard Money question (I dont want to get ripped off)
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13yYou won't get ripped off for a down payment. A down payment is simply your money going into the deal. Some HMLs require a certain percentage of your cash into the deal, some don't. Some will base the "value" on ARV, some won't.
8% would be very low for hard money. 12-16% would be more realistic. And 12-18 months, not 7 years.
18 Replies
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
You won't get ripped off for a down payment. A down payment is simply your money going into the deal. Some HMLs require a certain percentage of your cash into the deal, some don't. Some will base the "value" on ARV, some won't.
8% would be very low for hard money. 12-16% would be more realistic. And 12-18 months, not 7 years.
- Rehabber · Alexandria, VA · Member since 2011 · 446 posts · 171 votes13y
I definitely do not have that much experience with HMLs but I can tell you what I learned from looking for my first lender:
1) A lot of it is deal oriented. The better the deal is the better your terms may be (eg. less downpayment, maybe less points/rate)
2) The more experience you have and the better your track record the more likely you will get funded. If you don't have this then more emphasis is put on finding a killer deal. Don't expect premium terms at the start.
3) The way you present yourself and the deal is paramount. I put together a pretty detailed investment summary that laid out all the numbers for my HML. I even included what their potential profit would be using the terms they provided. First impressions count a lot in this business so make sure you have your ducks in a row prior to reaching out to any HML's.
Lastly, putting money down on your own deal shouldn't be regarded as a negative, at least not initially while you are growing. Why would someone want to invest in your deal if you yourself aren't willing to put more of your own money into it?
Just my 2 cents, others may think differently.
Glenn
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes13y
Get an arsenal of real estate lenders for deals that show up and need fast money. A down payment is expected by nearly every hard money lender. What you want to watch out for is "upfront fees," disguised as underwriting fees, admin fees, legal fees, etc. Make sure before you give a hard money lender an upfront fee, that you have done your homework on that lender first.
There are a few companies out there offering 100% financing, no down payment required. Most of these guys charge upfront fees though and really cherry-pick the deals they lend on, so beware. Just because a lender gives someone 100% financing on a real estate deal doesn't necessarily mean that lender is going to give YOU 100% financing on your deal.
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes13y
I agree with Jon Holdman, Glenn Espinosa and Corey Dutton.
In addition, hard money rates are local. The national guys usually have to charge more to compensate for not knowing the local market. So first, find some guys local to you. Ask around at your local REIA for both hard money lenders, and for people who have used hard money locally, so you can get their impression of the lenders they used.
Contact those lenders to ask about rates and terms. You might as well be honest with them that you are new, because they'll be able to tell within the first 20 seconds anyway. Ask if rates get better as you get more experienced. (They usually do, but not always)
- Lender · Los Angeles, CA · Member since 2012 · 147 posts · 76 votes13y
California: So much money chasing so few (hard) money deals that hard money has evidently gone soft.
Last one we saw: Lender was trying to charge 8.9% and 5 points on a 65% loan to value investment purchase. Another hard money lender went 8.5% on a 3 year interest only. Then, to get the deal, he paid ALL buyer's escrow, title and recording and took all the up front lender fees (3 points) and put them in the form of a prepayment penalty, so buyer paid NOTHING up front but prepaid interest and insurance and tax proration.
But again, there's LOTS of money chasing FEW decent deals here in California. (weather's nice, though)
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
I can see that in California with many areas going up at a rapid pace the HML lender feels the can't lost if it forecloses they will still make money.
In many other states markets are just starting to come back so you have to be much more cautious.
- Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes13y
I was hoping to see where I might offer some profound advise here but all the good comments have been made!
In the beginning (1978), I couldn't understand why those hard money guys were so worried about loan-to-value ratios. Since I didn't have much money to start, I just borrowed on credit cards, which were about the same as the Carter-era mortgages.
When I started brokering and lending hard money in 1989, rates were commonly 15 & 15 or 18 & 20 for 2nds! Like most of us who had poor early guidance, I experimented with high LTV 2nds to borrowers in foreclosure. Amazingly, many defaulted. I learned quickly that at 80% LTV in a down market, you don't make money, irrespective of the points you charged.
Then I met my mentor, Mike, and he taught me the business. 65% was the max LTV and less for some properties; a lot less for still others. I was very fortunate to meet Mike.
For a prospective hard money borrower in today's market, competition or not, they need to know that lenders who expect to remain in business want a borrower to have as much skin in the game as possible. For seasoned, grizzled investors who plan to keep their money safe, that translates to yield means nothing if the principal is in jeopardy.
By reducing my max LTV to 50% (including costs) I've eliminated most all investors who are unable or unwilling to offer property that attracts my money. After all, if the only thing that I have to assure repayment is to seek liquidation of the collateral, I'm going to be picky about what that is and where it's located.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes13y
Originally posted by Joel Owens:
I can see that in California with many areas going up at a rapid pace the HML lender feels the can't lost if it forecloses they will still make money....
Sounds like "loan to own" could be making a comeback there ...
- CA · Member since 2011 · 762 posts · 182 votes13y
Originally posted by Joel Owens:
I can see that in California with many areas going up at a rapid pace the HML lender feels the can't lost if it forecloses they will still make money.Even the worst investor can be successful in a rising market, loan to own is even less likely, not more likely. The reason there are so few hard money deals right now is because flip deals are so hard for investors to find, if fewer short term rehab deals then fewer hard money loans. Everything is being sold to owner occupied or buy and hold investors, neither of which are suitable for hard money, or should I say private money, as it now seems to be called.
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes13y
Originally posted by David C.:
Everything is being sold to owner occupied or buy and hold investors, neither of which are suitable for hard money, or should I say private money, as it now seems to be called.I've come across quite a few HMLs that are eager to lend to fix-and-hold investors, though they may want to make sure that you are pre-approved for the take-out financing once the 4-6 mth no-cash-out refi seasoning period has elapsed.
Since banks and conventional lenders have imposed lengthy seasoning requirements on refi's, it seems logical that HMLs would move in to fill this gap. The HML knows the property will be generating rental cash flow as soon as it's rehabbed, so that should give them some additional comfort on these types of loans.
One HML has this technique on their website to create a 100% financing situation. They offer 10 & 2 financing for 6 mths, extendable with additional pro-rated points. Of course, the property will need to appraise out on the back end or some funds will need to be left in the deal.
_________________________100% Financing Using Down Payment Reserve:
[LENDER] offers an innovative way to assist fix-and-hold real estate investors with their desire to build rental portfolios with little to no cash out of pocket after the refinance is obtained. [LENDER] will typically require 10 to 20 percent of the purchase price plus repair amount at the time of property purchase and loan closing; however, if desired by the Borrower [LENDER] will hold the down payment in a "Down Payment Reserve Account" and will make the loan for 100% of the costs of the project. When the loan is paid off, the Down Payment Reserve Account is refunded to the Borrower. The benefit to the Borrower is that when they refinance the loan it will be possible to refinance for an amount equal to 100% of the costs without seeking a "cash out" refinance to recover their equity. The down payment reserve account is fully documented for the borrower via a security agreement and is shown as a line item on the HUD closing settlement statement. In the above example, the loan amount would be for $170,000 and the "Down Payment Reserve Account" would be $17,000 which would be held by [LENDER] until the loan is paid in full, and then refunded to the Borrower. It is recommended that someone wanting to use a Down Payment Reserve get pre-approved, before he has a contract on a property, not only with [LENDER], but with the conventional takeout lender as well. [LENDER] can refer you, if needed, to such takeout lenders for your consideration.
NOTE: I realize it's easy to google some of the above text and fine the lender.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes13y
I polled hundreds of hard money lenders earlier this year to try to find out the "market" price of this money. Ultimately we're going in another direction for our debt needs, but this is what I found:
1. 2 out of every 3 on the list I built 5 years ago are now either out of business or are no longer lending. This should speak to the risk involved in this type of lending when asset values depreciate like they did during the 09 mortgage crisis
2. These are the "market" rates FOR THE SUBSET that was lending on new construction projects. Note that the term on these notes matters a lot; especially if you'll have a lengthy rehab where the project duration may possibly exceed the note term to get a marketing period long enough to find a suitable buyer.
5 points, 15%
13%, 4 points, 1 year, 70% LTV
13%, 4 points; talking 90% LTC, 1-year IO, $750 processing
9.9% IO, 3.5 points, no prepay, 1-year, 90% LTC
70% of appraised value, 4 points, 14%, 95% LTC, 1 year
65% LTV, 90% LTC; 13%, 3-4 pointsThe best lender I found in the country that would loan on new construction projects in Austin was 9.5% IO, 3.5 points, no prepay, 1-year term, 90% LTC.
Local small regionals will loan at 85% LTC (the FDIC standard limit without carrying an exception on the books) at about 6-7% and 1 point. Thus hard money is not very competitive unless you are equity-constrained with no alternative. We have chosen to ration our capital and be more selective with project selection instead of leveraging more and using hard money for our projects. We're also partnering with other funds to structure preferred equity in a new LLC instead of messing with hard money. There are others like lumber financing companies that offer hybrid debt products with minimal equity participation as well. I would call around and try to find some of those instead of dealing with hard money lenders.
I don't think hard money makes a lot of sense unless it is your only option available. You may consider saving more equity and dealing with banks instead.
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes13y
Originally posted by Steve Babiak:
Sounds like "loan to own" could be making a comeback there ...
.I really wonder how much of “loan-to-own” is urban legend. Anyone lose a house like this, know of anyone who has, or know a lender who does it? I asked this previously and the response was crickets in the background.
It would be easy to be a jerk and force a borrower into foreclosure, but how would you be guaranteed to get the house at auction at a price that made sense? Otherwise, why bother? How/why could or would your force a DIL? I’m not trying to expand our repertoire, just curious.
Originally posted by Joel Owens:
I can see that in California with many areas going up at a rapid pace the HML lender feels the can't lost if it forecloses they will still make money.
.It's been rough 6 months since prices began to meteorically rise around here, with a commensurate drop in inventory (currently at about 1½ months in LA!!) and we've barely seen a perceptible drop in business. I must say, I didn't expect it. Bruce Norris, a well-known and well-respected local prognosticator and large HML around here, said the same thing recently at one of his presentations. Though he's rolled out some new programs, I don't believe he's changed his rates and I know we haven't either.
Bruce attributes this to the "street smarts" of our borrowers who seem to be able to buy out from under the hedge funds and the owner occupants who can't pay cash. I agree and add that it also points the inefficiencies in our markets (i.e. no one knows everyone or every program), the importance of forming close relationships and trust with your borrowers, and above all, providing a competitive advantage. Offering exceptionally cheap money and paying expenses won't help an active flipper if you're so conservative you'll only loan at 50% or even 65% LTV.
I believe the drop in the rates by some is simply due to a drop in demand from those who are so conservative their business has tailed off, than by a perceived safety they see in a rising market. When they raise their LTV, irrespective of rates, I'll believe it's due to a rising market.
Jeff
- Lender · Los Angeles, CA · Member since 2012 · 147 posts · 76 votes13y
Joel, Steve and others:
Thanks so much for your responses.
Jeff, thanks for the valid California input, and especially the mention of Mr. Norris, my mentor.
Here's something that relates to how I work, and how many of my hard money colleagues work, that may differ from some of what you've heard of or observed.
The concept of "loan to own." Yes, many hard money lenders have gone that route, and it's had horrific effects on our market, laws, and reaped havoc on our industry.
Truth is, that for many of us, who are more conservative hard money lenders, our business model NEVER makes money when the borrower defaults.
Yes, you heard me right. Of course, if we have a 300,000 loan on a house that's dropped in value to 325,000, we're going to lose money.
But what if we have a $150,000 first trust deed on a house that's worth 300,000. If we foreclose are we going to make a killing on our "loan to own?"
No, because if you've attempted to bid on any 150,000 first td foreclosures on 300,000 houses (even in a much worse market) there's bidders and all you get as the first trust deed holder is your principal, interest, late charges and advances. NOTHING for all the extra time/effort for monitoring a foreclosure, dealing with bankruptcy counsel, etc., etc.
So when we say our best world would be if we never filed another foreclosure, we're "truthin."
Again, there are those cowboys who really think that making hard money loans is a way to acquire property - but if you meet one of them, turn 180 degrees and RUN.
Joffrey Long
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