The Hard Money Process?

Question

Hey BP community!  My partner and I have our first rental property underway and were able to finance the deal with our own capital.  We are now in the beginning stages of exploring creative financing for further projects.  We know what hard money is but would love some information on the process.  Questions of how interest is paid (monthly or lump sum), is there a pay down schedule and is the interest only on the remaining balance.  Anything informative about the process from start to finish or what to bring to the lender to secure the loan would be a huge help to us.  We are in Chicago so if you are in the midwest and offer lending we would like to connect!

Eric Johnson · Answer

Jason,

I am also in Chicago. Rehab loans are typically 80%-90% acquisition (depends on experience, 3 deals done in last 36 months is helpful to get increased leverage) & 100% construction. Construction funds are heldback at closing and are disbursed as borrowers complete work and request reimbursement.

They are 12mo interest only loans paid monthly. 9.25-10.00% (per annum) is a good rate to start with for estimations. Most transactions are 2-3 points. No prepayment penalty.

To get a loan, you will need prove you have a solid deal (the profit margin is great enough) & that you have enough cash to close.

Jason Deangelis · Answer

@Eric Johnson thank you for the info Eric.  Awesome you are at that stage.  We are preparing for that and want to move right into it once we finish our initial stages of our first property.

Aubri Paredes · Answer

@Paul K.

I’m 2 years late to this but do you still have the document available? Newbie here and looking to fully understand the process as well.

Paul K. · Answer

@Jason Deangelis

Hi Jason, I am just across the border in WI and have a document I could email you that provides a comprehensive overview of the entire process.  Just send me your email and I’ll short it over.

Paul

Jason Deangelis · Answer

Thank you all for the information.  it has been very helpful in better understanding the process.

Jonathan Klemm · Answer

@Jason Deangelis - @Eric Johnson gave you some spot-on information.  Sometimes you can find some lenders as low a 8%, but I am a firm believer in you get what you pay for.

Some of the better hard money lenders charge a premium, but they are quick and time is money.....

Crystal Smith · Answer

I'm not a lender, just play one on TV. We use to lend privately and have used "hard money" often.  Here's the process, at least the process that we're used to:

• If you're renovating, once you have a property under contract you'll have to provide the Hard Money Lender (HML) with your contract and the scope of work
• The Hard Money Lender will send an appraiser, sometimes 2 appraisers to determine the AS-IS Value along with the After Repair Value (ARV). Most HML's will lend a % of the ARV.
• The HML will escrow $ for renovation. Depending on the HMLs program you may be required to escrow $. 
• Payments are interest-only payments during the length of the project
• The construction plan you submit to the HML should include phases for payments to the contractor. The HML will send an inspector after each phase upon which they will either pay you or the contractor for completion of that phase, They charge you for the inspection
• If you intend to keep the property as a rental some HMLS have a program to move you from the Hard Money Interest only loan into an amortized 15 or 30-year loan.

Michael Kinsella · Answer

Hi Jason,

I thought @Eric Johnson gave a great response.

To add my 2 cents,

Interest is typically paid monthly, and some hard money lenders charge only on funds disbursed vs. the total loan amount. It's an important question to ask your prospective lender, as it will vary and can influence your cost of capital significantly, particularly if you have a large rehab budget.

To give you an idea of the general workflow from your end...

Submit preliminary application --> Submit loan application/materials required for appraisal (generally a scope of work and purchase agreement) --> Submit additional docs to underwriting --> Receive appraisal/final loan terms --> Provide closing materials --> Closing --> Servicing --> Payoff (sale or refi)

I am also in Chicago; feel free to reach out anytime!

The Hard Money Process?

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