Confused about LTV for Hard Money

30 Replies

I've read a lot of posts about this, and am still a bit confused. If I am purchasing property that the asking price is $99500 and the appraisal is at least $155K which makes under 65% LTV, if I am getting a hard money loan, do I still need a down payment? If they loan up to 65% wouldn't that mean I could get the loan for $99500 and not have to put a down payment down, and I could just pay closing? The equity is the down payment? Or am I not understanding how this works? Do I need a down payment regardless, but I just can't get a loan for more than $99.5K, and the downpayment would be 5,10 or whatever percent of the 99.5K of the loan?

Amy,

When a lender determines the value of a property being purchased, we take the lower of the purchase price or appraised value. That is the number we then use to set our loan amount. So if you purchase a property for $100k and it appraises for $150k, we set our maximum LTV as a percentage of the $100k price. This is standard with everyone. Remember, hard money is risky for the lender too and they will always want you to have skin in the game.

One way around the down payment is to use another property as collateral if it has great equity. Some lenders will also use After Repair Value on a rehab deal, but you will still need some some kind in the game, maybe just not as much. Keep In mind this is hard money and if you have great income and credit a bank or credit union might get you around the big down payment.

Just a note, some people use hard money for the purchase. Then use the appraised value to refinance and pull their cash back out. Most conventional lenders make you wait 6 months or a year to do this, but there are portfolio lenders that will do it right away. That means you only need the down payment money for 30-60 days. If you can set it up like that, then maybe you can borrow from friends or family and pay them back right away.

Hope that helps.

A hard money lender will lend based on the value of the property, normally if you buy a house that will be worth $150k for $100k, it will need some rehab to be worth $150k.

Let's say that rehb will cost $15k,, let's say the hard money lender will lender you 66%  (to make the math easy)of $150k, but you have to pay not only the cost of the house, but you have to put $15k in escrow.

At closing the hard money lender brings $100k (66% of $150k) to the table, you bring $15k plus closing cost. You must escrow the rehab cost, because the HML is lending based on the value after the rehab,  


make sense? 

To compliment what Jason stated well and give you pause for thought.  If a property is "worth" $155,000 and is only selling for $99,500 it is more practical to assume the house is only "worth" $99,500.  Otherwise, a rational Seller would seek a higher sale price.  This would imply that some amount of repairs or cures would be needed to capture the "potential" of the home selling for $155,000.  Thus the reason for the discount.

Ok well I guess I'm not seeing the point then. If I had money for a 35% down payment I'd just get a conventional loan. That's making the situation worse not better. I have excellent credit, but also only 6 mo at my current job and not a ton of cash in the bank. I really only have about 7-8K available. I thought that was one of the benefits of hard money, it was weighed more heavily on the property vs how much money you have, or job length, credit etc but that doesn't seem to be true from the responses. Not sure why then you'd look at hard money unless you just needed it faster or had to many loans already.

House doesn't need (as far as I'm told) major repairs. Was remodeled in 2012 when the seller bought it, and he's motivated to get rid of it because he just got a divorce. He owns free and clear also. I actually am not entirely sure how to figure the value without having access to the MLS and getting real comps. Zillow and findcompsnow had an estimate of 185K but I know those numbers can be way off. It could be a lot less than even 150K I guess. The last guy was under contract but couldn't get financing, maybe this is part of the reason why, but that's purely speculation. At this rate sounds like I may not be able to either.

I'm currently saving about $1500/mo and have a good steady job, credit is 780. The cash is there, just not immediately, and I'd prob need a bit longer at my current job. I was hoping to be able to take advantage of this deal since the numbers look good even w conservative estimate regarding cash flow (it's fully rented pretty much turnkey w motivated seller). The numbers makes it a good deal (assuming no surprises at inspection) even at what he's asking, though in reality I'm looking for something w instant equity. 

From my experience, there are two kinds of private money.  Individuals looking for returns on their personal assets (with or without real estate background) and institutional hard money that a broker loans for an investor or a pool.

The latter usually have predetermined products which the loan must conform to (i.e. 65% LTV of the lesser of purchase or appraised value) and are brokered through mortgage lenders to conform to securities regulations.

You should be looking for a smaller private lender for your situation.  There might be a partnership opportunity or more flexibility based on the deal.  These are good relationships to build for a lot of reasons.

If you need to go to friends and family for a down, I would ask them for the full amount and avoid HML's entirely.

But something sounds fishy about the situation.  Fully rented, cash flowing, turnkey at a deep discount?  Why?

Also, consider offering 5% down on a seller finance while you season title for an appraisal -based refi.  Or wholesale it.

Wm

William is dead on about hard money. When I refer to hard money I mean larger houses like us that use funds from larger pools of money. To attract investors we generally have fairly specific guidelines to follow as far as underwriting because that is what we told the investors we would do to protect their money. While we do concentrate on the asset and don't care about your credit so much, we want you to have skin in the game. Otherwise a borrower might bail on the property if an issue arises.

Private money tends to come from smaller or individual investors more local to the property. We do this also but only in select areas where we are close to the property. Private lenders can be friends, family, local attorneys, local investors, etc. When dealing with local private money then the rules are  whatever that investor will do and vary widely. They are a great resource and much more flexible because they don't have to answer to anyone or worry about the secondary market. They are out there but you may have to spend a fair amount of time to find them.

Many people use hard money and private money interchangeably.  But they are really two different beasts. Private money Is better for smaller deals and residential.  Hard money is usually good for larger deals and commercial deals. With some exceptions of course.

Amy,

I would contact an appraiser in that area than can give you realistic comps with a desk review...Also, I would search options with various Hard Money Lenders, there are some here at BP that are members. If the comps look good, I would consider paying for an ARV appraisal. Did the seller say any type of repairs were needed at all? If there are some repairs, then a Hard Money Lender would consider the ARV value verses the acquisition cost. If the repairs could cost what you have in escrow, or you could get someone to lend you the repair money for escrow, then I would consider that option. I also would consider private money and offer them points with a reasonable interest to motivate your cash lender. Blessings on this one!

Belinda  

Seller said a few cosmetic things they would take care of before closing, but it was remodeled in 2012, new roof in 2008, termite prevention in 2013. He bought it cash, fixed it up, it's rented but he got a divorce and needs to be rid of it. I think the key is going to be finding comps/true value.

I think you're getting some bad advice on here on hard money. Not because its bad advice but because there are simply different types of hard money lenders and the ones commenting above are not the right ones that fit what I believe you're looking for.

There are some hard money lenders that will lend you a percentage of the purchase plus rehab. And there are some that will lend you as a percentage of the ARV.

The former types and some of the people on here that are suggesting they will lend 65% of the 99k make no sense to me either. So you and I are in the same boat. It makes no sense for me to pay the points and the super high interest rate if I'm putting 30% into the deal. Why do i need hard money if I'm putting that much down? Use a regular bank.

Now what I'd recommend you do is find some of the hard money lenders that have the right program for what you seem to be looking for. Find one that will lend up to 65% of the ARV of the home.

So, in your example. if your puchase prices is 100k and it needs 10k in rehab, then your all in price is 110k. The hard money lenders that I use will then have an appraisal done based on what the house will be worth AFTER (hence the term ARV or After Repair Value) the rehab is completed.

They will lend you up to 65 or 70% of that ARV number. So lets say it appraises out at 150k based on the house being fixed up. And the rehab/hard money lender lends up to 70%, they would do a loan for you of 105k total.

They'd pay 95k at the closing and 10k would go into a rehab escrow that they would hold until the work is complete.

That means you'd have to come up with the other 5k to purchase the home PLUS the closing costs and points that hard money lenders charge (typically 4 to 6% of the total loan amount). In this example, you'd probably be out of pocket about 5k for purchase, 5,500 for points, and another 2k or so for closing costs. Or roughly14k total.

But there are two reasons why hard money is such a valuable tool.
1) If you can find better deals, you can limit your out of pocket to just the points and closing costs. With some hard money lenders (there's one I've done a lot of deals with) that will even roll the points and the closing costs into the loan so you truly have a no money down deal. But the deal has to be tremendous to do that.

2) Even at 14k, you're still doing far better than if you were to use a traditional loan.

For those, you'd need to come out of pocket 25% plus pay the rehab and closing costs out of pocket. In your example. 100k purchase (25k down) plus 10k in rehab plus 2k in closing costs.  Thats 37k that you would need to do the deal.

And try getting that money back out. In a flip, sure. In buy and hold, thats a cash out refi that is much harder to get. Using the hard money loan, you would have a loan of 105k and could rate/term refi that out so you only end up out the 14k total.....

Amy,

Let's assume the numbers you've laid out are correct. Doing the math on this and assuming zero down, with pretty reasonable HML terms of 12%, interest only payments, due in 6-months. After $15,000 in repairs, purchase costs, holding/financing costs, and selling costs, you're looking at a net profit of around $13k.

Now, that's nothing to sneeze at.  However, it assumes only 3 months for holding, which is seriously aggressive in some markets just for the sale, and ridiculously optimistic for a newbie and includes absolutely NO contingency for surprises in the rehab.

You must...

  1. 1. get accurate comps and nail down your ARV
  2. 2.  tour the property and get an accurate repair estimate...if there isn't work needed beyond $15k of "lipstick" stuff, why is the seller looking to unload it?
  3. 3.  figure out how long similar properties in the area, at similar price points have stayed on the market, prior to sale

Do those things, then run your numbers using the new data.

My personal opinion is, assuming the numbers are accurate - which I don't, an experienced rehabber could net $13k.  You would be better off selling the deal with an agreement to let you shadow the rehabber for the experience.

Just my 2 cents!

Amy, 

As a hard money lender, we are not in (at least me and probably most of the BP HMLs) in the business of loan to own.  If we were to lend on a property that you put no money on it's risky for us as it could tie up our funds and time.

For instance, if we lend you $65k on a $100k valued property (with no money down--at least to cover the closing costs etc...) you could, in theory, wake up with a headache the next morning and not want to be in REI industry anymore and simply tell us to keep the property. It's a crazy scenario but if you have no skin in the game there is nothing really tying you to the property other than a perceived future profit, which may or may not come to pass.

Now, having said that, after a few deals are under your belt with that lender I bet things could change to better suit your needs :)

Regards, Lenny

This is getting a bit off kilter.  

The OP, doesn't have much investing experience.  The idea of a Hard Money Lender is it takes into consideration the property and exit plan as a substitution for borrower credit.  That is not the same as meaning "cheaper" credit.  The risk to the Lender is greater and as such a larger down payment is required and higher interest is demanded.  (Not to mention fees/points)  The "cheapest" form of credit is always conventional financing.

If the property is in a divorce settlement, it's not going to be selling for any substantial discount without affinity to required repairs.  Married people splitting up generally do not allow such things to happen, or a least their lawyers don't.  Since a divorce in general means both parties are going their separate ways, they generally want to maximize the proceeds from sale, so again, likely not a substantial discount unless it is warranted.

What the OP needs is an experienced partner frankly.  Minimal contribution, misunderstandings of the mechanics and insufficient experience and lack of funds.  All those things bundled into one have the workings of some monetary damages.  

Even if the property has a Subject To Value of $155k, it is going to need some serous repairs.  The OP doesn't seem experienced with such things at this time.  

Let's be honest, it's HIGHLY UNLIKELY this thing is worth $155k.  So why all the wishful thinking?  Let's get a little practical.  It's probably at best $99,500 and could be worth less.  (Now that sounds like a martial asset) The failure of the previous Buyer's financing should be a concern.  (Go ask why it was denied)  The property might not pass inspection, whether appraisal or property.  That's a big elephant in the room and one that adds some good detail to what is really happening here.  It's also the low hanging fruit in terms of answers.

Even if the OP found a HML that would advance on a future value so as to limit her down payment, the interest demand will likely put her underwater. She would be 12 months away from being able to refinance. If she has to contribute to the interest payments or property, her reserves will diminish further causing problems with future financing. Then poof, loan matures and forecloses. That's not the solution.

Amy, it could be a deal, might not be. Perhaps someone you know is more experienced in REI than you are at this time. See if they can help you. You need a partner not a lender. Be prepared to give up a decent share of all of this, while still making yourself some money, to bring them in and gain the experience so the next time you are in a better position to act on your own.

Sorry if that's a bit brash, I don't see the value in spinning speculative wheels.  Good Luck.

A lot of people keep giving examples of rehab. This isn't a rehab, from what I was told anyway, whether or not that's the true story is besides the point. If it was a rehab, I wouldn't do the deal. I'm def not comfortable doing a major rehab at this point.

At any rate, I think I'm getting in over my head here. I think it may be a better idea to wait a few months and not try to spread myself so thin and take the risk on hard money anyway. I also think having someone who can help me with the actual value is really key for me since I don't have any experience. If it's really not worth much more than asking, it's not really worth it. 

I think a wiser course of action would be wait a few months (I'm currently saving 1500/mo, find an agent or partner, buy something smaller, turnkey and go with conventional financing. Maybe rexplore the FHA option.

Thanks guys!

Slow and steady wins the race. Good answer Amy. For every one that goes head first over their head and makes it, there are a hundred that lose their shirt. Good luck to you. You have the right attitude.

@Amy Van Ollefen  

Try taking it to a local REIA (or posting in on their site if they offer that) to find a partner and/or an investor friendly agent who can run MLS comps for you. Instead of walking away from the deal, use it to build connections. If your numbers are off, experienced locals will tell you quickly. So far you've risked nothing but you have an opportunity you can leverage into meaningful experience that will help you next time if this one doesn't add up.

I've seen situations like this where the house represented such bad blood, the seller wanted to lose money to punish his ex.

Good luck!

Unlike conventional financing, with the banks and traditional lender's incredibly long list of guidelines, hard money loans are driven by protective equity, as determined by the lender.

Here's how it works: 

I'm the lender and it's my money. You are a borrower and the only thing that you bring to the party is a house. You think something is worth more than I do.  I don't care that you think it's worth more. 

Should I elaborate or slow down?

But I do think these lenders are giving bad advice.

One is suggesting that you can't find hard money lenders that don't require more skin in the game.  I think Dion makes a good point that you probably will run into an issue with getting the better hard money lenders (i.e. better in terms of not requiring any down payment) until you've done a few deals. So that is a very good catch.

I thought it was more of an exercise in explaining the value of hard money and didn't even think of asking her about her experience.

Bottom line though is that I started using hard money after my first deal. I used a very large hard money lender that basically provided 100% of the purchase, 100% of the rehab and rolled in the points to boot.  I came to the closing tables with NO MONEY at all!

The deal, obviously had to be tremendous. But that was the limitation I had to preserve my capital so I could grow so I knew that going in.  

And now I'm using 2 other hard money lenders that do 100% of the purchase and rehab but won't do the points which means I'm coming out of pocket about 5 to 7k per deal. Still not bad. And a great way to preserve capital to continue to grow.

I don't want to violate any advertising rules here. But if you want to know the one I've used that rolls it all into one, let me know.

btw: I am NOT a hard money lender nor do I work for one nor do I get referral fees for any either. I do pass on the lenders info I use though because they've been very good to me. And if I can help em get more business and help fellow investors do what I've done, I will.

I could never have gotten 29 (soon to be 30) houses in 7 years without using hard money lender. I'd be at 3 or 4 tops right now!  That would have been an incredible missed opportunity to set myself and my family up.

So even though some of the options above may not make sense. Believe me, hard money is a great way to go.

One last note. I think, again, there was some bad advice above where they stated that you'd have to wait 12 months to refi. Thats absolutely not true. For a conventional rate/term refi, you're looking at 6 months tops. You just need to find the right lender. And if you really were in a hurry, you could do a rate/term refi in 2 months.  For that, you would need to go with a portfolio lender and commercial terms, but it could be done. 

And again, its a way to keep your deal flow moving faster and churning your financing spot(s) over quicker to buy more homes.

If not bad advice, at least short-sighted, @Amy Van Ollefen . When a hard or private money lender uses words like, "This is standard for everyone," or starts a sentence with "A hard money lender will…" they are really only expressing what they do or believe. Private loans are non-institutional so, within the bounds of the law, lenders as these are free to chose any terms they want. That is, the only thing consistent about a private loan is that there is no consistency.

In addition, much as it bothers some, lenders will call themselves what they want (hard money, private money, asset based, etc…) and there are no strict, legal, or "official" definitions or guidelines.

Traditionally, hard money loans are based upon the value of the asset that secures them. This could be the ARV, purchase price, or both, so when a lender uses the term LTV, you always have to ask what they base that on. The associated formulas and limits can also get rather convoluted, so I could see why you're confused. Just because someone posts his or her criteria here, doesn't mean it applies to anyone else. If it's not obvious, ask.

Further, anyone who suggests that 90 or 100 percent loans don't exist, frankly, doesn't know what he or she is talking about. This was bad advice. In addition, as short term flips dry up, and as demand dictates, private lenders do exist, looking to lock-in relatively longer-term buy and hold loans, even at lower interest rates. Plus, it seems some asset based lenders want to rely on conventional lending criteria such as FICO scores, low LTV's (using any definition), and multiple appraisals -- all while enjoying hard money interest rates.

None of this is to say that there's a lender for everyone or that if you look hard enough, you'll eventually find someone foolish enough to hand you a bag of cash for your entire project cost. The terms you receive will generally depend on the quality of your deal, it's suitability to particular lender, who you know, and of course, your level of experience. The less you bring to the table, the more valuable a strong partner and an experienced lender can be.

@Rick H.  There's really no need to be snarky.

Thanks everyone for your input. I am seeing that it really does depend on the details of the situation, on all fronts: the borrower, the lender, and the deal. 

Turns out this wasn't a deal. At least not one I wanted to do. It had good cash flow sure, but I talked to a realtor in the area, and it's in a bad neighborhood, and their property management co wouldn't even manage it. I'm sure if I tried hard enough I could find SOMEBODY to lend me the money, the question is, do I really want them to? In this case, not so much. 

Originally posted by @Jeff S:

If not bad advice, at least short-sighted, @Amy Van Ollefen . When a hard or private money lender uses words like, "This is standard for everyone," or starts a sentence with "A hard money lender will…" they are really only expressing what they do or believe. Private loans are non-institutional so, within the bounds of the law, lenders as these are free to chose any terms they want. That is, the only thing consistent about a private loan is that there is no consistency.

In addition, much as it bothers some, lenders will call themselves what they want (hard money, private money, asset based, etc…) and there are no strict, legal, or "official" definitions or guidelines.

Traditionally, hard money loans are based upon the value of the asset that secures them. This could be the ARV, purchase price, or both, so when a lender uses the term LTV, you always have to ask what they base that on. The associated formulas and limits can also get rather convoluted, so I could see why you're confused. Just because someone posts his or her criteria here, doesn't mean it applies to anyone else. If it's not obvious, ask.

Further, anyone who suggests that 90 or 100 percent loans don't exist, frankly, doesn't know what he or she is talking about. This was bad advice. In addition, as short term flips dry up, and as demand dictates, private lenders do exist, looking to lock-in relatively longer-term buy and hold loans, even at lower interest rates. Plus, it seems some asset based lenders want to rely on conventional lending criteria such as FICO scores, low LTV's (using any definition), and multiple appraisals -- all while enjoying hard money interest rates.

None of this is to say that there's a lender for everyone or that if you look hard enough, you'll eventually find someone foolish enough to hand you a bag of cash for your entire project cost. The terms you receive will generally depend on the quality of your deal, it's suitability to particular lender, who you know, and of course, your level of experience. The less you bring to the table, the more valuable a strong partner and an experienced lender can be.

And that's why the original poster is confused. 

Sure, with enough research and patience a borrower might find a high LTV lender, however these lenders are neither reliable, consistent nor around when the cycles change.

I've been around for, nearly 40 years and I've survived and thrived.

Anomalies do exist. And specialty niche lenders do, too. I pioneered several niche markets and not only own the largest mortgage company serving those niches but I'm also the major investing the the other two competing lenders, as well. 

If someone finds a true lender (and not a broker/pretender lender) who can consistently fund their deals  based on 100% of contract purchase price, my hat is off to both to the both of them. 

If you want make deals based on the industry norm is, find out what the norm is, if you want to borrow based on another formula, get your own investors and convince them why your plan is solid. If they are your friends and relatives (because no independent investors would buy into your plan), remember that you might get a cold shoulder at Thanksgiving Dinner if things go sideways.

I think @Jay Hinrichs  could give his perspective on this, since he experienced taking back collateral while the market was declining. 

Come on Jay Hinrichs. Weigh in. Perhaps the OP will be more receptive to the message and less concerned if coming from a different messenger.

@Steve Babiak  

unfortunately yes very experienced. And many of the new people on the block that are HML started in post 07 08... and they got the benefit of the free fall in values. And one's like me that are basically out of the business but retooled how we do things. For me the day of lending to a unsophisticated or newbie investor that wants to jump into RE is not something I would remotely consider no matter the skin in the game etc etc. But most HML that made it through did because they required real down payments.. @Rick H.  

is correct pretty hard to find a 100% shop that is consistent. Unless its very low valued assets or a very well established TK type player that has deal flow.  But I have no doubt that they exist time will tell if they have a solid portfolio or if we have a bubble working in the wholesale price.

I know in my market here in Oregon Most of the HML if not all require skin in the game 10 to 20% of total project costs not to exceed 65% ARV.. but these are much larger loans like CA.. 200 to 600 or more HML.. and in the bay area you can get HML for 10% with a point. But its 25% down and half of the rehab.. so many of the deals there you need 250 to 500k in CASH equity to do a flip... I was just looking at two in SF and one in Los Altos and that was the case..

@Rick H. I'm not exactly sure what has given you the impression that I'm not receptive to whatever "message" one way or the other. I understand the perspectives that were brought up in this thread. From my first impression it seemed like hard money was the solution if you didn't qualify for a conventional loan, and if you had a good deal on a house it didn't really matter what your personal circumstances were, and if it was under 65% LTV (or whatever the specific requirements were) you could get a loan for than entire amount, but looking into it more it didn't necessarily seem like that was the case, or it was all that different as far as qualifying for a conventional loan. It seemed like there was more to it than that, and so I was just trying to understand and get clarification. It's really not necessary to act like I'm an idiot because I have no experience and asked a question. What I'm not receptive to is condescension. I think I'm done with this thread.