Understanding Hard Money Lending
Real Estate Agent · Lexington, SC · Member since 2022 · 13 posts · 9 votes
I'm not looking for step by step but wanting to make sure my processing is correct.
I'm a realtor and have found a property I believe has potential for a great flip.
With absolutely nothing to offer money wise I would hate to let this opportunity slip between the cracks.
Here was my thought process after listening to podcast after podcast and reading constantly about hard money lenders.
1) Gather all information (comps, ARV, estimate from reliable contractor, all related documents, etc.)
2) Follow through with hard money lender to pay cash for property and renovations with agreed terms
3)Purchase property
4)Renovate
5)Sell
6) Pay back hard money lender (amount borrowed plus interest)
7)Done Deal
Obviously this is very over simplified, but I wanted to make sure my idea of what a hard money lender could/would do wasn't too far off for someone in my situation.
Am I missing anything? I'm ready to take that leap and ! am open to suggestions.
If you're an agent most lenders will give you a point of exp for a license, so that's good.
If you're a 680 credit this is what you can expect:
1) You put down 20% of the purchase
2) Since this is deal 1 you may not get 100% of the rehab. You may only get 80 or 90%. I'd have to plug actual numbers in to see.
3) You will pay two points which is 2% of total loan amount (80% purchase + 80/90% rehab)
4) They'll be fixed closing costs around 1,400
5) You'll need a 6 month builders risk HOI policy before you close
6) You'll need to spend about 1,300 for title work
7) Once you close, you need the first money in for the contractor to get started. Most contractors want 25% down to start then 50% then 20% then the last 5% after all is done. So if your rehab budget is 80k then that 20k to get started will come from you and then when work is completed you request a draw to be reimbursed. That's the way these loans work unless you have enough experience to get advanced draws.
8) You can sell it so that is a bonus - but you'll want to cover steps 1 - 7, and you may also need a LLC set-up for the deal.
I wouldn't take the project if you don't have any reserves. Find a partner who will put up the money and 50/50 it or just lend you the down payment
As an agent, just consider the hml like any other lender. Shop around and get pre-approved. These loans are specifically non-owner occupied, short term (6-12 months, maybe extension to 18), and usually include funds for acquisition and for rehab. I'm not sure what you mean by, "Follow through with hard money lender to pay cash for property..." You are still technically buying the property with financing... You say, "with absolutely nothing to offer money wise..." However, do you realize that you will have to put some money down towards the purchase and some as well for the rehab? Unless you can show tremendous experience they won't lend you 100%...
As an agent, just consider the hml like any other lender. Shop around and get pre-approved. These loans are specifically non-owner occupied, short term (6-12 months, maybe extension to 18), and usually include funds for acquisition and for rehab. I'm not sure what you mean by, "Follow through with hard money lender to pay cash for property..." You are still technically buying the property with financing... You say, "with absolutely nothing to offer money wise..." However, do you realize that you will have to put some money down towards the purchase and some as well for the rehab? Unless you can show tremendous experience they won't lend you 100%...
David, do you personally have experience with these types of deals? I would love to get some more info
I'll add some nuance at specific points to the process you described above...
2) Follow through with hard money lender to pay cash for property and renovations with agreed terms
3)Purchase property
4)Renovate
In general, a HML will provide some portion of the purchase price and then 100% of the renovation cost on a reimbursement basis.
For example, a HML may provide "80% of the purchase price and 100% of renovation cost".
What this essentially means is that they provide 80% of the purchase and then you outlay the initial renovation cost (typically done in a draw fashion).
Let's say your rehab budget is 60k total.
You may choose to split this into 3 equal "draws" of 20k each.
What this means is that in addition to covering 20% of the purchase price, you will also need to outlay the initial 20k for the renovation and "float" that amount throughout the renovation process until you receive reimbursement for the last draw.
5)Sell
6) Pay back hard money lender (amount borrowed plus interest)
Don't forget that you will likely be making monthly interest payments during the term of the loan. The principal amount will be paid back in the event of a sale, but you will still likely be responsible for making interest payments monthly.
If you're an agent most lenders will give you a point of exp for a license, so that's good.
If you're a 680 credit this is what you can expect:
1) You put down 20% of the purchase
2) Since this is deal 1 you may not get 100% of the rehab. You may only get 80 or 90%. I'd have to plug actual numbers in to see.
3) You will pay two points which is 2% of total loan amount (80% purchase + 80/90% rehab)
4) They'll be fixed closing costs around 1,400
5) You'll need a 6 month builders risk HOI policy before you close
6) You'll need to spend about 1,300 for title work
7) Once you close, you need the first money in for the contractor to get started. Most contractors want 25% down to start then 50% then 20% then the last 5% after all is done. So if your rehab budget is 80k then that 20k to get started will come from you and then when work is completed you request a draw to be reimbursed. That's the way these loans work unless you have enough experience to get advanced draws.
8) You can sell it so that is a bonus - but you'll want to cover steps 1 - 7, and you may also need a LLC set-up for the deal.