Using Hard Money Lender to buy a house in cash a good strategy?

14 Replies

I have noticed that buyers with cash have an advantage when buying real estate and can close faster and get better deals. Do you think it would be a good strategy to get cash from a hard money lender to get a good deal on a property...and then refinance with a bank. How long is it expected to take? How much do hard money lenders charge? Can you recommend any good ones?

If you don't have the funds to complete a deal, then sure.  I would make sure to have everything lined up beforehand so you're not stuck with a property that you're paying a high interest rate on.  Go into a local bank, find out about what they require for refinance, maybe open up a checking account to show good faith if you think you're going to work with them.

You can definitely fix/flip into refinance, or even use products from Lenders that help you purchase, and have higher rates than conventional, but get you the seasoning needed to refinance. 

Oh, I would want to refinance right away once I buy the property. I know I would probably be able to only refinance 70%-80% of the property value. But I would have to wait a year for seasoning before I would be able to refinance and I don't know if it's in my best interest to do that.

Well, buying with hard money is Not a cash purchase.....it’s still a financed purchase subject to the HML approval....it wouldn’t give you the supposed advantage of making a “cash” offer.

I know of some buyers who are able to get cash for the purchase of a property and the cash is not theirs, How else are they able to do this?

Hello @Renata Heleno :  

Depending on the hard money lender and your relationship with them, you may still need to have cash in the deal for a down payment due to the lender's loan to value ratio and the deal you are getting.

If the hard money lender will only lend 70% loan to appraised value, then you would need to make a "down payment" in order to get the loan.

For example, if you found a property worth/appraised at $100,000 you negotiated a deal to buy it for "cash" at $80,000 in 2 weeks, your hard money lender will only lend you $70,000 (70% of $100,000) so you would still need to bring $10,000 plus closing costs to the deal.

So while you are making a "cash" offer, the cash is short-term transactional cash where you intend to refi.

Now when I lend I don't require a seasoning period and I am happy to collect my rate for as long or short as you like during the term.  However, many banks when doing a refi will only refi based on the purchase price for the first 6 months.  After that you can get a new appraisal and refi at the higher value.

Bob

@Renata Heleno Yes, I think using hard money gives you a great advantage if the deal is a good one and you have your exit strategy planned out well. Using hard money for me has been practically the same as using cash. However, a hard money lender will look at the deal to see if they think it is a good one before they lend on the property. So this way the deal gets another set of eyes on it.

Hi @Bob Razler, Thanks for your input, It's good to know that the bank would refinance in less than a year on purchase price. It seems some cash buyers get really great deals just because they are buying in cash so I think it may be worth it depending on the deal.  How much do hard money lenders usually charge though?

Thanks for your input Shiloh, how much do hard money lenders usually charge?

@Renata Heleno

I just responded to a similar thread you posted about the refinance.

Hard money is as good as cash in the eyes of a seller if you don't have a financing contingency and can close quickly.  Typically when I make offers with hard money, they've always been considered a cash offer.

I've seen hard money as low as 8% interest and 2 pts.

Hi @Nghi Le , Thanks for your input. So it is 8% a year? What if you refinance right away? do you still have to pay 8%? 

Perhaps it may be in the better idea to wait the 6 months to be able to refinance on the appraised value

What are the risks of using cash from Hard Money loans? I think one obvious risk is if the housing prices tank for whatever reason and you are not able to refinance. 

Originally posted by @Renata Heleno :

Hi @Nghi Le , Thanks for your input. So it is 8% a year? What if you refinance right away? do you still have to pay 8%? 

Perhaps it may be in the better idea to wait the 6 months to be able to refinance on the appraised value

What are the risks of using cash from Hard Money loans? I think one obvious risk is if the housing prices tank for whatever reason and you are not able to refinance. 

The 8% a year would be like any other mortgage. It would be the principal at 8% interest amortized over 30 years or it might be interest only. There is usually no prepayment penalty. However, 8% would be really low for a HML. Hard money loans are typically 10-15% interest with 3-5 points plus attorneys fees to draft the loan docs. The people getting lower than 10% rates on HML's are usually experienced flippers who have an established relationship with the lender and do lots of volume. A hard money lender is also probably only going to lend up to 60-70% of the value of the property.

The risks are the same with any other loan only magnified because of the high interest rate. They are also typically short term loans in the 6 month-2 year range. So there's an additional risk there if you are unable to refi quickly. 

@Renata Heleno

Sorry for the late response; I didn't get notifications since the tag seems to not be working.

The 8% is annualized, so if you finish the project within 6 months, you pay 4% in interest.

There's plenty of risk anytime you leverage.  A downturn is one, but so is how you run your rehab.  If for some reason your project takes longer than the term of the loan, you might not be able to get an extension, at which point the loan is due and they start foreclosure.  This is why I'd always get 1-yr loans on my flips though.  I had a flip that took 2.5 years; that was a painful lesson.

@Tyler Sterns

You have some really expensive hard money over there. I've been working with national lenders (who should lend in MD too), and the worst terms I've seen are 12%, 3pts for someone with no experience. Most HMLs I work with go up to 70%, some of them go up to 75% of ARV. What matters more is perhaps loan-to-cost, which I've seen as high as 90%-95%.

You're going to be spending so much on fees and closing costs.. hope you're getting a REALLY good deal...

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