Hard money lenders SCARY?

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Hard money lenders SCARY?

Valerie Smith
Rental Property Investor · Fernandina, FL · Member since 2018 · 66 posts · 18 votes

☀️I’ve seen a couple posts about people being approved for hard money, then the lender backs out or changes terms etc. I’ve also been warned that some hard money lenders can be a scam. I invest in Florida and Georgia and would like to know which you recommend. Called Lending One and because we’ve never used hard money they said we’d have to do 15% down plus 2 1/2 points, Interest (starts at) 11.5% plus some other fees. These were quotes without pulling credit or filling any paperwork out. Anyone used them or think these are good rates for a 1st time user? I kind of thought one of the points of using a hard lender is so you don’t have to put so much down.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y

HML require downpayments unless you have years and many deals with them .. first time borrower for certain.

and yes way too many crooks out there.. advertising deals that are too good to be true .. and many people get sucked into sending them money thinking they found this unicorn cheapo lender. 

Lending one is real

lima one is real

lending home is real. 

and keep in mind HML need to make at least a 12% apr to stay in business.. these are not banks borrowing from the fed they get their money from YOU the investor and have to pay far more for it than a bank pays for thier money.

I know most people dont understand how HML works.. but suffice it to say they need to make 4 to 5k a file up front no matter how they do it with points junk fees etc.. plus need to make at least 10 to 12% on the note rate. other wise there is no reason to be in the business.

And like were @Ned Carey works rates can be higher simply because the risk is greater and the foreclosure times very long and costly. especially NJ NY  . So in states with very quick foreclosure rules that are not run through the court system but are handled by Trustee services you can mitigate your risk becasue you can get the asset back in 6 months or less in stead of like the states mentioned above were it can take years.  FLA is middle of the road about 1 year state but still judicial.  Take GA for instance you can be through the entire process in 60 to 90 days same in Texas and Mississippi.

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    @Valerie Smith most hard money lenders these days do expect you to put money into the property. 

    Is this for a rental or a flip?  Lenders virtually always expect money down for a buy and hold.

    0Reply
  • Valerie Smith
    OP
    Rental Property Investor · Fernandina, FL · Member since 2018 · 66 posts · 18 votes
    7y

    @Ned Carey Hey Ned. Thanks for the reply. It would be for either/or. We were thinking of doing a flip to make some cash to use to help us get buy & holds. We’re more into buy & hold long term though. We bought our duplex & tri plex with our own money in the last 2 years but need some more capital to keep going.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    HML require downpayments unless you have years and many deals with them .. first time borrower for certain.

    and yes way too many crooks out there.. advertising deals that are too good to be true .. and many people get sucked into sending them money thinking they found this unicorn cheapo lender. 

    Lending one is real

    lima one is real

    lending home is real. 

    and keep in mind HML need to make at least a 12% apr to stay in business.. these are not banks borrowing from the fed they get their money from YOU the investor and have to pay far more for it than a bank pays for thier money.

    I know most people dont understand how HML works.. but suffice it to say they need to make 4 to 5k a file up front no matter how they do it with points junk fees etc.. plus need to make at least 10 to 12% on the note rate. other wise there is no reason to be in the business.

    And like were @Ned Carey works rates can be higher simply because the risk is greater and the foreclosure times very long and costly. especially NJ NY  . So in states with very quick foreclosure rules that are not run through the court system but are handled by Trustee services you can mitigate your risk becasue you can get the asset back in 6 months or less in stead of like the states mentioned above were it can take years.  FLA is middle of the road about 1 year state but still judicial.  Take GA for instance you can be through the entire process in 60 to 90 days same in Texas and Mississippi.

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  • Valerie Smith
    OP
    Rental Property Investor · Fernandina, FL · Member since 2018 · 66 posts · 18 votes
    7y

    @Jay Hinrichs

    Ok so it sounds like you're saying if we needed a HML for property in Georgia the rates may be a little less than Florida because it's easier for the HML to foreclose on that property if we weren't to pay them back. Am I understanding that correctly? Thanks for responding.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Valerie Smith:

    @Jay Hinrichs

    Ok so it sounds like you're saying if we needed a HML for property in Georgia the rates may be a little less than Florida because it's easier for the HML to foreclose on that property if we weren't to pay them back. Am I understanding that correctly? Thanks for responding.

     could be.. however keep in mind as a first time borrower your not getting best rates or least amount down.

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  • Valerie Smith
    OP
    Rental Property Investor · Fernandina, FL · Member since 2018 · 66 posts · 18 votes
    7y

    @Jay Hinrichs

    Thank you!

    0Reply
  • Ryan BlakePro Member
    Lender · TX · Member since 2018 · 936 posts · 713 votes
    7y

    @Valerie Smith What @Jay Hinrichs said about how HMLs work is exactly right. The money we use is from private investors in a fund. Most funds will try to get between 9% and 11% back to their investors. To do this they need to have the APR be around 12%. If they are offering less, it is because they are making up for it in other areas. As far as points and fees go, those are what actually pay the bills to keep the business running. It may seem like HMLs are making tons of money because of the interest and fees but they aren't making nearly as much as investors think. Most HMLs end up with very similar rates and fees, it is just how they are presented and where they come from that differ. Go off of recommendations rather than rates.

    And NEVER pay anything up front. Don't pay an application fee or anything like that until you are sitting at the closing table.

    [email protected]214-420-7324
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  • Valerie Smith
    OP
    Rental Property Investor · Fernandina, FL · Member since 2018 · 66 posts · 18 votes
    7y

    @Ryan Blake

    Great good to know not to pay upfront. It makes sense. I’ve seen a couple people mention they were originally approved by lending one for their flip etc then later lending one changed what they originally approved so the investor was left not being able to close the deal. Wasn’t sure if that was most peoples experience or just those few people. Do you work for a hard lender?

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  • Ryan BlakePro Member
    Lender · TX · Member since 2018 · 936 posts · 713 votes
    7y

    @Valerie Smith I do but not one that lends in Florida. That being said, I will give you advice if you want it.

    The situation about Lending One is not uncommon across all HMLs however. It sounds like it may be an appraisal issue. HMLs will lend up to a certain % based on the ARV. If the ARV comes in lower than what the borrower stated on their paperwork, then it will change the amount borrowed. I would have an agent run a BPO (Broker Price Opinion - ran by a real estate professional and almost always free) to get a good estimate of what it will appraise for.

    If you have any other general questions, please post them here so others can benefit as well.

    [email protected]214-420-7324
    2Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    7y

    A HML first and foremost has to protect their interests. I only write about 30% of loans offered to me. I have a low risk tolerence.

    2Reply
  • Valerie Smith
    OP
    Rental Property Investor · Fernandina, FL · Member since 2018 · 66 posts · 18 votes
    7y

    @Ryan Blake

    Ok that makes more sense! Thank you so much!

    0Reply
  • Valerie Smith
    OP
    Rental Property Investor · Fernandina, FL · Member since 2018 · 66 posts · 18 votes
    7y

    @John Thedford

    Thanks John!

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    “It may seem like HMLs are making tons of money because of the interest and fees but they aren't making nearly as much as investors think.”

    I actually am making tons of money! But then again I only lend on commercial property and our average loan size is 2 million.

    Private Mortgage Financing Partners, LLC
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  • Heather Willenbacher
    Member since 2019 · 1 post · 3 votes
    7y

    Help me understand the timeline of events to use a HML. First, you find a deal and make an offer. If offer approved by seller, generate a report to show to a lender the potential of a property. Then, you figure out the financing with a HML or private investor?

    The tight timeline is a little intimating. Do you have any advice/ tips to make this process seem less overwhelming and rushed? 

    3Reply
  • Tina Jenkins
    Member since 2018 · 101 posts · 14 votes
    7y
    @Jay Hinrichs In your opinion what company would be the safest to go with for a first time buyer as far as hard money?
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Tina Jenkins:
    @Jay Hinrichs In your opinion what company would be the safest to go with for a first time buyer as far as hard money?

     local firms first .. then reach out.. I always like that local contact that I can go in their office.  well being the lender I liked local borrowers that could come into my office :)

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  • Alexander Flores
    Rental Property Investor · Beachwood, NJ · Member since 2015 · 132 posts · 50 votes
    7y

    @Heather Willenbacher

    The timeline we have done is as follows.

    Get approved through HML for x amount of money.

    Find a deal and offer using a proof of funds from the HML.

    If the seller accepts we go under contract.

    We need to send an itemized list of repairs to our HML.

    HML sends out their appraiser and inspector, if everything is good we close.

    Begin the rehab, asking for a draw each time the repairs are completed.

    Refinance once the property is rented.

    We do buy and hold for now. Our HML covers 100% purchase and rehab costs. We pay for rehabs upfront and are reimbursed when they're inspected.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Don Konipol:

    “It may seem like HMLs are making tons of money because of the interest and fees but they aren't making nearly as much as investors think.”

    I actually am making tons of money! But then again I only lend on commercial property and our average loan size is 2 million.

    Don I realized that and have been morphing into these larger deals.. not 2 mil  But larger for me.

    its pretty competitive for the 200 to 300k fix and flip loan.. with rates as low as I have ever seen them.. and you do need some scale to make any real money.. I think most of these folks on BP that don't really understand HML think that the lender has there own personal stash of 20 or 30 million and they are making not only all the points and junk fees but making interest on their money that is just sitting in the bank.. I don't think most of the folks realize that there is a money cost to the money they lend out. Just like I don't think many of these folks understand how banks work and where they get their money.

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  • Ryan BlakePro Member
    Lender · TX · Member since 2018 · 936 posts · 713 votes
    7y

    @Heather Willenbacher

    Every HML will work somewhat different but I will let you know the standard flow:

    1) Get pre-approved with an HML - This should be free. DO NOT PAY AN APPLICATION FEE. This is a sign of a possible scam.

    2) Look for a property and get it under contract.

    3) Send the executed contract to your HML. They will let you know what other little paperwork may be needed and probably order an appraisal. I am always skeptical of the HMLs that don't require an appraisal.

    4) After the appraisal comes back you will get a document that outlines the amount to be borrower and all fees that will be relating to the loan (I would suggest to ask for an example of this document when you are searching for an HML so you will know what fees are going to show up).

    5) Close the loan. This is the only time you should pay (you may need to pay the appraiser before hand).

    6) Begin work and make draws on any repair balance. Most HMLs will pay for work completed. To have the funds released you need to have a third-party inspect the house and the repairs made. Then they will release the funds based on what is finished.

    7) Sell the home and payoff the loan / rent the home out and refinance the borrowed amount.

    Hope this helps give a simple time-line. If you are looking to do a refi at the end of the hard money loan, I would suggest lining up that refi company at the same time you are looking for hard money. Your HML may have a company they work with frequently that will make it a smooth transition so ask.

    [email protected]214-420-7324
    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Ryan Blake:

    @Heather Willenbacher

    Every HML will work somewhat different but I will let you know the standard flow:

    1) Get pre-approved with an HML - This should be free. DO NOT PAY AN APPLICATION FEE. This is a sign of a possible scam.

    2) Look for a property and get it under contract.

    3) Send the executed contract to your HML. They will let you know what other little paperwork may be needed and probably order an appraisal. I am always skeptical of the HMLs that don't require an appraisal.

    4) After the appraisal comes back you will get a document that outlines the amount to be borrower and all fees that will be relating to the loan (I would suggest to ask for an example of this document when you are searching for an HML so you will know what fees are going to show up).

    5) Close the loan. This is the only time you should pay (you may need to pay the appraiser before hand).

    6) Begin work and make draws on any repair balance. Most HMLs will pay for work completed. To have the funds released you need to have a third-party inspect the house and the repairs made. Then they will release the funds based on what is finished.

    7) Sell the home and payoff the loan / rent the home out and refinance the borrowed amount.

    Hope this helps give a simple time-line. If you are looking to do a refi at the end of the hard money loan, I would suggest lining up that refi company at the same time you are looking for hard money. Your HML may have a company they work with frequently that will make it a smooth transition so ask.

    I would add that if your using Hard money to BRRR that its CRITICAL to have your take out approved just sub too a 442.. don't want to get stuck in hML and most HML will want to know the exit and if its a refi they want proof you can do that.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Jay Hinrichs, I believe you are right.  They just compare bank loan rates and think everything above it is pure profit.

    They also don’t realize the concept of risk adjusted return.  Since hard money loans are by definition much riskier than bank loans, the return, hence interest rates must be greater, otherwise why would anyone invest in these riskier notes.

    Our business model is a perfect example.  We run two funds.  Our average interest rate is 12%, of which 11% goes to the fund investors and my company receives the other 1% as a servicing fee.  Our points are 3 for a loan over $1,000,000, and 4 for a loan under $1,000,000.  In addition most of our borrowers work through mortgage brokers, who normally charge 2 points.

    Other HMLs, as you mentioned in a previous post, borrow from institutional lenders and relend the money. They pay rates of 7.5 to 9% and 1 point for the money. What the investor/borrower doesn't realize is that if the borrower stops making payments, the HML still has to pay interest to his lender. And a certain percentage will default.

    I always tell borrowers that they should borrower from whoever offers the best deal, but they need to take into consideration if quickness is an issue.  Some of our loans are to borrowers who qualify for bank loans, but need to close faster than banks can move.  We can typically close in 7 days from when we give a final approval, although in one extraordinary circumstance we closed in 24 hours.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Don Konipol:

    @Jay Hinrichs, I believe you are right.  They just compare bank loan rates and think everything above it is pure profit.

    They also don’t realize the concept of risk adjusted return.  Since hard money loans are by definition much riskier than bank loans, the return, hence interest rates must be greater, otherwise why would anyone invest in these riskier notes.

    Our business model is a perfect example.  We run two funds.  Our average interest rate is 12%, of which 11% goes to the fund investors and my company receives the other 1% as a servicing fee.  Our points are 3 for a loan over $1,000,000, and 4 for a loan under $1,000,000.  In addition most of our borrowers work through mortgage brokers, who normally charge 2 points.

    Other HMLs, as you mentioned in a previous post, borrow from institutional lenders and relend the money. They pay rates of 7.5 to 9% and 1 point for the money. What the investor/borrower doesn't realize is that if the borrower stops making payments, the HML still has to pay interest to his lender. And a certain percentage will default.

    I always tell borrowers that they should borrower from whoever offers the best deal, but they need to take into consideration if quickness is an issue.  Some of our loans are to borrowers who qualify for bank loans, but need to close faster than banks can move.  We can typically close in 7 days from when we give a final approval, although in one extraordinary circumstance we closed in 24 hours.

    speed and nimble is the name of the game..  I did one this week at 425k started on Monday funding today.  my fee's are higher for this kind of speed. but the vendor is going to make a nice profit.. that's the other thing I see a lot of these newer folks on BP struggle with.

    they think money is too expensive and even though they think a nice FICO should get them in the door.. it does not.. so they pass on deals thinking the money is too expensive so instead of making some decent money they make nothing as they continue to shop for loans they will never get..  

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  • Mark Sewell
    Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
    7y

    A really good HM lender will be an asset.  You will find dozens of people here arguing for paid coaches and mentors, but yet, somehow the HM lender is considered expensive.

    Wanna know what is expensive?  Not listening to your HM lender when he says, reluctantly, that OK, I guess they will go ahead and fund your deal, but they don't think it is all the attractive.  Then it turns out they were right.  

    Those guys are investors themselves, they know what rebabs cost, and they have a lot of experience to offer.  Consider that when you look at those fees.

    I will work with these HM lender guys here in Houston again.  But believe me, next time I'll be more open to their feedback.

    3Reply
  • Mark Sewell
    Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
    7y

    As for the original post, just find somebody local.  They will be at all the meetups.  Talk to others that are working with them, someone that will refer them.  The big national guys are great, but you won't get the local knowledge, zipcode by zipcode, that you will get with the local HM lenders.

    0Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    7y

    Their quotes are reasonable although most others want more than 15% down. Most people are obsessed with FICO score. I never had anyone under 700 approaching me last 14 years. Their quotes is for decent credit.

    Hard money is for short term like 6 months not for buy and hold. I find HM lenders from Wealth Management firms who watches their vendors like hawks.


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