What are your 3 biggest problems with Hard Money Lenders?

Question

I've been researching the hard money lenders in my area, and I was wondering if anyone would share their 3 biggest problem with HMLs?

Bill Mitchell · Answer

They can call me as much as they want if I am using their money at 8-10%.

Jackie Lange · Answer

Hard money lenders charge WAY too much. By the time you add in loan fees, points and high interest, they often make as much or more than you will.

Private lenders are sometimes more affordable but they have a tendency to think they are your "partner" in the deal and will call every few days asking about the status of the project and when it will be complete.  If you structure the financing as  EQUITY PARTICIPATION it is better, but they will still fell like they are a partner in your deal.

The only solution...

The best and most affordable financing is buying with creative seller financing.  If the seller gets cash and puts it in the bank, they will be lucky to get 1/2%.  If you can offer to pay them more they will usually say YES

Tom A. · Answer

In my experience REIAs are where you find smart private money. Meaning that they know what they can earn investing in real estate themselves, so you better bring a financially compelling investment offer.  Newbies will get shut down unless they have a killer deal with massive security for the lender.  Experienced investors who are known quantities AND  pleasant and trustworthy people to do business with will get "expensive" but very feasible prices for money.

If you want 6% - 8% for five years better talk to your Aunt Sally.  If you're flipping a house, have a track record, aren't a slimy character, and can pay high teens interest for six months you'll find plenty of lenders at the local REIA who'll bankroll you. If you know what you're doing their "expensive" money will cost you 1/5 to 1/10 of what you pocket.

David Beard · Answer

Hi @Bill Mitchell  - I hear what you're saying there.  Are you really able to find lenders at your REIA at 8% for rehab projects?  My impression would be that most REIA folks are looking to do real estate transactions themselves, or be lenders or JV partners at something more akin to hard money rates or a profit split.  How have you found these folks that will make relatively low-rate loans similar to what you would offer Uncle Harry?  And by the way, I'm not being facetious, in case it sounds that way :)

David Beard · Answer

Tom N.  - I think you're spot on with your assessment of finding 6-9 mth rehab money in the mid to high teens (including any points/lender fees) at the REIA from "smart private money", as you say. I was just questioning the poster's comment about finding it at half of hard money rates, and wanted to frame expectations.

I would expect a "smart private lender" at the REIA to beat HM rates by a couple percent and 1 or 2 points, but not be half as expensive (which might equate to 6% and 2 pts).  Otherwise, the "smart private lender" isn't really so smart and probably doesn't hang out at REIAs.

@Ann Bellamy - very good point as well about the different flavors of REIA, I'm sure that's true.

This is the mother of all thread highjacks, what was this thread about?  Oh yes, @Marty Brodsky works for a HM lender and was doing some survey/marketing work to stir up business.  That's OK, I love capitalism, and love to see all the market participants mixing it up.  Marty, you appear to have a loan that provides 60-80% of purchase+rehab, less funding than typical HM but cheaper rates and terms.  So this would be a pretty typical risk/return tradeoff for the lender, and sounds great for a borrower who has enough cash to bring 20-40% of P+R, plus closings costs/fees, carrying costs, interest payments, and at least the first 1/3 of the rehab cost.

For the "professional" full-time rehabber who is trying to do several simultaneous deals and leverage their cash, or the newer rehabber with limited resources, however, this would likely not be enough funding.  If I've mischaracterized your loan, please correct me.

Hans Restuccia · Answer

by the way- great topic!!!

Hans Restuccia · Answer

We are a HML and we simply make deals happen for people who need our service and the numbers work for them! Period!

We tell the borrower, "If the numbers don't work, or if you can get better financing, do not do the loan w/ us- get the funds elsewhere because we are expensive."

But sometimes its a great deal, they need to close fast- (we can close in 1 or 2 days), we can come up w/ $1.5 million immediately and we have virtually no requirements other than equity in a residential based property.

Now that is why I am staying very, very busy closing loans! (Plus we are in Miami which is "hot!"

Marty Brodsky · Answer

@David Beard I'm glad you brought up that I work for a HML, I certainly am not trying to hide it. I honestly want to know what it is about hard money that gets such a bad rap. You've categorized our loans well, and our borrower is probably not the novice investor with little capital to put in; but we've done multiple simultaneous deals will full-time investors, so I think the amount of leverage we provide to cost works for the right person.

One thing that I've noticed is that a lot of HMLs have inflexible rates (one local lender does 15/4, even at 60% LTV). It seems as though ever deal should have rates tailored to the specific details. Maybe that's unrealistic for some lenders.

I don't mind that this thread has gone into a discussion about private money; it seems like when it comes to conversations about lending that's always the direction it goes. The thing is, your typically hard money lender seems to have gone to the extreme end of the spectrum. With the amount of risk some our taking they have to consider credit, income, and other factors that go beyond the hard asset. Has the market pushed lenders into this realm too far? It now seems that people always expect loans to ARV. And what's more, expect rigid rates of 23% annualized.

@Joel Owens One of the metrics that has a large affect on what we value a property at is liquidation price. If we take the property back we don't want to get stuck with it, as you mentioned, so the question really is how much are you willing to discount it?

Joel Owens · Answer

I looked at doing hard money before.

If you listened to any of the current hard money lenders there is a lot of things to watch out for.

If the HML is using other people's funds and promising a certain return then the HML is making money mainly off the points charged and not the interest rate. In that case and many other HML's it is how fast can you churn the money and relend it out again on points and not the ongoing payments.

I disagree that a rehabber with  a track record will pay mid to high teens for money. They usually have people flocking to them at a reduced return because of the experience and they are putting some of their own money into the deal.

National HML's will be unfamiliar with a local area and will usually be higher in percent of interest rate, points, and a lower ltv to price in the risk of lending outside their core area.

A local HML knows block by block and can give better rates usually. Private money even if someone is getting 9% percent and a few points is doing way better than sitting in a bank account. The only difference is instead of placing with a HML lender they are doing the deals directly.

The one thing I didn't like about possibly being HML lender is that if the property goes bad my money can be locked up for a long time before I get it back.

Ann Bellamy · Answer

True hard money is very local.  So what may be true for @Bill Mitchell in Mansfield Texas, may not be the case for @David Beard in Cincinnati or anyone else.  Some REIA's have tons of people looking to fund deals, some seem to have almost none.

What are your 3 biggest problems with Hard Money Lenders?

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