How Hard money lenders work

Question

Hello BP, need of some help. I’m looking at a deal to do my first flip, the numbers are good. The property I can across is 58,000 and 50k in repairs and the ARV is around 150k from what I saw on Craigslist. I looked at some hard money lenders. So my partner got  pre qualify  for 77k with 21k down. My question is do we owe them 56k or the 77k plus the interest? I Appreciate the feedback

Charles Kennedy · Answer

@Gervon Simon Any prudent lender will require equity to be put in at closing. This so the investor has "skin in the game" and will be invested and will likely try much harder to make sure the project succeeds. So he will put his entire $21k in to close, then the hard money lender will likely put up the remaining $37k + closing costs to purchase the property. At this point the HML may either:

a) give him the remaining amount of the loan to begin construction or

b) Allow Jorge to begin construction and will reimburse him for costs of construction as the HML approves that work has been completed. This is customary for banks to do, but not sure how it is with a HML.

Gervon Simon · Answer

@Charles Kennedy, So the money that he would have to put down, is that due prior to the project or at the end?

Charles Kennedy · Answer

Woah, woah, woah, I don't know how @Ahmad Eltawely said it's 56k, it's 77k!

And honestly, you are short on funding if your estimation is correct. You've been qualified for a 77k loan, and are putting 21k of your own money down, correct? If the lender believes your ARV, they are giving you only 50% LTV. Also if your estimations are correct of repairs of 50k, then you need a total of 108k. With your 21k equity and 77k loan, you are only at 98k!!! Do you have another 10k to come up with?

You will owe them 77k and will have to pay interest on that.

Jorge Ibarra · Answer

Thanks for the feedback. We looked at other lenders but that’s the best one we found specially for being our first flip.