What is the point of hard money if you need a downpayment for it?

24 Replies

I have talked to three hard money lenders today and each wanted 20%-40% down for a rehab. I understand the idea of having skin in the game. But, If I am going to be putting that much down I might as well just get an FHA 203 loan when I qualify in eight months. The down payment, to my understanding, kind of defeats the whole purpose of using hard money to begin with. I am really running out of options. May have to break down and find a partner, really not something I want to do. Although, there's also REITs.

Hard money will loan on properties that the 203 would not touch.  Most investment loans are going to require 20% plus down.  Also hard money can close faster than conventional loans

Originally posted by @Thomas Quinn :

Hard money will loan on properties that the 203 would not touch.  Most investment loans are going to require 20% plus down.  Also hard money can close faster than conventional loans

 Short and too the point. Thank you very much. :)

IMO, it really is the "skin in the game" requirement.  Lenders want to lend money ... they really don't want to foreclose on a property and then either sell it (probably for less than the loan balance if they financed 100%) or fix it and flip it.

If the HM borrower walk away the day (or week) after securing a HM loan, they really have not lost anything.  The HM lender loses a  lot.

@Kevin Yeats I understand the risk involved in a Hard money loan but it seems a bit one sided when HM lenders are charging 3-5 points and lending at a rate of 18% (+/-).  We actually did a lease option, fixed the place up and then got a conventional on our first flip in order to avoid all of these fees that would have seriously cut into our net profit. At the beginning of our real estate investment careers this can be very frustrating.  Especially if we already have the property sold and we are planning on doing a double closing.

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Just as RE investors like to take advanatge of those who have to sell fast hard money guys stick it to the RE invetsor who arent properly financed.................lol.

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i understand leverage.   It goes both ways fella.   Leverage isnt all peeches and creem!

Originally posted by @Thomas Quinn :

Hard money will loan on properties that the 203 would not touch.  Most investment loans are going to require 20% plus down.  Also hard money can close faster than conventional loans

I second that comment. If you have a real choice between a HML and a 203, you'll always take the 203 as it is MUCH cheaper. HML have a place for when other options are not available because of restrictions, qualifications, credit scores (HMLs tend to led based on the deal/collateral, less on the credit score), time constraints, etc. They are VERY expensive but they do have a place for the right circumstance.

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Well said Ken Vesely ! I couldn't agree more with everything you said.

If anyone has a cheaper / easier alternative to HM then of course they should use that. A 203k is for owner occupant loans only.

I lend HM also and I feel one of the most valuable features of HM is how quick loans can get funded. Lenders routinely can fund deals in a day or two. Great for short sales with expiring approval letters !

Originally posted by @Account Closed :

@Andrew S. if you get a 14 day contract on a short sale there's no shot at a 203k loan to close it! 

Exactly - and THAT is when you pay up for a hard money loan. Like I said, these products all have their place and use. If you need the speed or flexibility, you'll be willing to pay a premium for the HML.

Explaining the benefits of using hard money is sort of like having to explain your jokes (because they are not funny).  An investor needs to know the following, and then it will make the decision to use hard money a lot easier:

  • Use less of your own cash than a bank
  • Close quickly, and use that as a negotiating tool
  • Keep all of the profit, rather than splitting with a partner
  • Stay in control of your deal, rather than having a partner to answer to
  • Borrow the repair funds

Wash, rinse, repeat.

Hard money is not the solution to every financing question but as an investor you need to understand the proper uses for hard money and then it becomes a simple analysis of your particular situation.

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    Looks like ur hard up

    Two main points: 1) hard money moves fast and so the biggest point of it is that you should be able to get the property at such as great price that the HM is worth the cost in interest and points ave with the high down payment. 2) hard money is much more acceptable of properties that agency lenders just won't ever touch. Some other benefits include the fact the hard money lenders can actually be helpful in the process. Many local leaders operate like experienced partners and will bring a lot of knowledge and resources to the table. As you build a relationship with your lender that down payment amount will likely reduce you are paying a premium for your lack of track record. Once you have one, you will have more negotiating room. I usually put down between 0-10% but I had to do some deals first with each lender plus have a good portfolio with a strong track record. as you are building your portfolio think to the future. Take good pics of before and after, track the funding and returns well and build a nice portfolio history document. You will find this helps you negotiate smaller down payments. Good luck.

    Advantages?

    • HML will cover all properties, sight-unseen
    • HML can fund quick, sometimes within one hour
    • HML is usually easy to pay off if you're keeping the house and have it whipped into good enough shape to take traditional financing
    • Some HML lenders will fund flippers with no interest payments, money due when house is sold or @ 12 months in a balloon payment
    • HML will give you better rates if you're experienced. 6 pts 18% is ridiculous. I've got some now at 4/12 (30% down), 0/12 (0% down), and 3/10 (0-20% down).

    Purpose?

    • Will fund property regardless of condition on houses banks won't lend to
    • Fast closing is super important when dealing with a motivated seller
    • Buying at auction--good luck buying without all the $$$ upfront

    In return for those advantages you have a higher downpayment, points and interest than traditional loans. Unless you can self-fund or partner, you'll have to use PML for all auctions, super-fast closings, and torn-up houses.

    I would add as a word of caution, that 203K loans are not cheap. If you had planned on making a profit by doing renovation work yourself, 203K won't work. 203K requires you to pay thousands of dollars in professional services that you might otherwise not use. You are required to hire a 203K approved contractor, approved 203k consultant, etc. The additional cost is at minimum several thousand dollars. For example, if you approach any bank that offers the 203K product, they will tell you upfront that their is an additional set of fees, which they ballpark at $5k. And that is not including the additional cost of the 203K general contractor--more $thousands.

    And it goes without saying, if time is of the essence, a 203K poses a very serious risk to losing a contract.

    I believe there is a diary on BP by someone who tried to use a 203K to purchase a property. They nearly lost the contract and ended up using private money to close.

    Then again, if you do not have the down payment and cannot get a private money loan to get it, then your choices may be limited and 203k is your only option if the home requires work that prevents you from getting a traditional mortgage.

    Good luck in your endeavor.

    Originally posted by @Mason V. :

    I have talked to three hard money lenders today and each wanted 20%-40% down for a rehab. I understand the idea of having skin in the game. But, If I am going to be putting that much down I might as well just get an FHA 203 loan when I qualify in eight months. The down payment, to my understanding, kind of defeats the whole purpose of using hard money to begin with. I am really running out of options. May have to break down and find a partner, really not something I want to do. Although, there's also REITs.

    Hard money and FHA 203k loans are completely different products so you can't really compare one to the other. Do you intend to live in the home? 203k loans are for owner-occupants only, whereas hard money lenders typically only lend on investment properties and NOT on a property you intend to live in.

    If you don't have the money or desire to invest some of your own funds in the deal, maybe a partner wouldn't be that bad of an option. Afterall, 50% of a deal is better than 100% of no deal.

    Hard money loans aren't for everyone or every situation, but when it comes to these types of loans (or any loan for that matter), those who have the money get to make the rules.

    Originally posted by @Account Closed :

    I can answer this easily

    @Kevin Yeats one sided? go get a JV partner that will take 1/2 the profit, and might want a preferred coupon added to the loan as well. Hard money is ALWAYS cheaper than a partner!

     I don't understand you comment.

    Partnerships can be established as long as both partners agree to the terms ahead of time.  Two partner could pool their available cash and buy a property WITH NO LOAN and split the profits 50/50 and no preferred coupon on any loan.  That would be cheaper than Hard Money.

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    Originally posted by @Kyle J. :

    If you don't have the money or desire to invest some of your own funds in the deal, maybe a partner wouldn't be that bad of an option. Afterall, 50% of a deal is better than 100% of no deal.

     Yeah, I am well aware a partnership may be the best bet. However, experience has taught me that 100% of no deal may be the best course of action. I will think about it though.

    "You get what you pay for" - couldn't be more true here. HML = quick, low paperwork, high price to pay. Conventional/203K = slow, lots of paperwork, reasonable price to pay.

    If you know what you're doing, get a HML. If you're inexperienced, definitely find another route or you'll get eaten alive.

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