Hard money questions

[Terrance Clark]

When dealing with a hard money lender can some one break down the order of operations. I would like to know how the home inspections work as well as renovation quotes? I'm am located in North Carolina purchase price is 70k ARV is in the ball park of 270k. We can come out of pocket 14k between closing and fees. Help please

[David Seroy]

Hey DeMarrius,

Typically speaking, that $14K would come out of pocket and the lender will not count that as something which can be deducted from the loan, at least I typically would not. 

With that said, if you're working with a private lender (which most hard money lenders are private individuals, meaning they are not connected to wall street or a more traditional bank) it means they can structure a deal however they want. There is no absolute rule saying they can or cannot do something (except for obvious illegal practices). That is quite literally why private money or true hard money is so incredibly valuable in the real estate investment realm. It's built to provide flexibility and a competitive advantage. That's one of the reasons why people pay higher fees for it. I think that's important to keep in mind.

So, if you find a smoking hot deal, where the LTV's are low, the lender has absolute comfort that you are a proven and reliable investment, then I wouldn't put it outside of the realm of possibility that you can include the points and upfront fees as part of the loan. However, as I said before, I wouldn't expect that to be standard.

There is a more long-winded answer to this, but at its core a hard money lender takes comfort knowing they have a asset (the property) backing their loan. The reason why you receive a loan in the first place is because I know there is a hard asset securing the loan or rather the debt. Further, when I give you additional money to perform construction, it's because that money is being used to increase the value of the property, which is securing the loan. So, in theory a lender only wants to provide money when it's being put towards the "hard" asset, which ultimately keeps their money safe. If a lender finances a borrowers point and closing costs, that money is not directly contributing to adding value to the asset and therefore it means I'm increasing your Loan but not the Value, hence you're increasing your LtV, which is a bad thing for a lender. Hopefully that makes sense, bottom line, from a lender perspective, if I give you more money, then it means the property should be increasing in value as well.