The missing print in Hard Money Lenders Ad

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The missing print in Hard Money Lenders Ad

James Kandasamy
Real Estate Investor / Syndicator · Austin, TX · Member since 2013 · 210 posts · 135 votes

BPers,

                        Not all hard money lenders cost structures are the same. From my experience of working with 3 different hard money lenders , I have discovered a key hidden cost structure that only a few would realize and not advertised. Most of the time, many investors both newbies and seasoned does not realize this until you work with different hard money lenders and discover inconsistencies among them. If you are not aware of this cost, it can cost you a few thousands of dollars in your real estate endeavors. It’s important for you to know this unadvertised charges as part of your hard money lenders selection criteria

                        The cost that I am talking about is the interest charges to "pre-drawn" rehab funds. Assume that you buying a 50k house with 30K rehab cost. Your total hard money in the deal is 80K.  The criteria that almost all hard money lenders requires is that the draws are made after the work is completed.  On the day you close, you hard money lending loan is 50K and the remaining 30K will be made is few draw cycles as the rehab progresses.Lets assume your rehab requires a period of 2 months with 50% (draw of 30K / 2 = 15K) project completion on 1st month and another 50% (draw of 30K / 2 = 15K) on the 2nd month. What I found out is that there are two type of lenders that charges interest differently.

  • Lender A would charge interest on total purchase + rehab amount from day 1 after closing till you get out of their financing.
  • Lender B  would charge interested on purchase amount on day 1  but would adjust the loan amount interest based on draws amount.  To clarify Lender B would charge 50K+ 15K ( 30k divide by 2) at the end 1st month and 50K + 30K on second month.

 If you have gone with the lender A, you would have paid interest on 30K for 2 months even without having the money work for you. If a lender charges 14% interest, that would be a $700 extra interest that you have paid them for a money that you have not used during rehab phase.

Imagine if its higher interest or the rehab spans across 3-6 months or the rehab cost is 30-50K …. It can be thousands of dollars.  

Why we should pay that if the money is not drawn out ?

James

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Account Closed
Investor · Kansas City, MO · Member since 2010 · 239 posts · 110 votes
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There are other considerations too. For instance some HMLs charge a pre-payment penalty while others don't. Some HMLs charge a due diligence aka upfront fee to review the deal. Others have draw inspection fees. Points and interest can vary depending upon the area of the country you're in or the subject property is located. 

All this said at the end of the day leverage is the name of the game in real estate investing. Many investors would say the ability to leverage OPM if the investor doesn't have the entire amount of funds needed for the deal is worth more than saving some interest or fees but not doing the deal to begin with.  HMLs often provide the type of financing banks do not (such as rehab loans) to real estate investors, and usually without much U/W or qualifying. Plus, the goal is not to keep it long, you want to get in, get out, make your money and move on. Regardless the type of financing you don't want to keep it longer than needed.

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  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    11y

    "Why we should pay that if the money is not drawn out ?"

    In fact, @James Kandasamy , from the HML's point of view, the money is drawn out. A wise borrower will require the rehab money to be deposited into an escrow account, with specific disbursement instructions, so he or she knows it will be available when needed.

    Obviously, once the money is escrowed for your use, the HML cannot loan it to anyone else and cannot make a return on these funds. Whether they want you to pay interest on the escrowed money or not, and how they calculate these payments, is between you and they. The nice thing about borrowing private money is that the terms are not universal. You must find a lender whose terms fit your project. Be careful with this, though.

    Don't ever allow the HML to hold "your" rehab money and then hope it's available when you need it. The name of the game in lending is to be loaned out at all times. You don't want an HML loaning the rehab funds you will need to someone else and then hope they have it when you're ready. Don't accept this as an option to avoid paying interest. Better to find another lender if it bugs you. This applies to the large mega HMLs to a loan from your aunt Mable.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @James Kandasamy 

    Most HML have a finite amount of capital to lend say they have 30 million... once they commit 200k for you then its gone and cannot be used for other loans.. the banks on the other hand fund draws with available cash they do not put the funds aside.

    I like Jeff when I do my deals if there is large rehab that has to go out I draws the funds go to the closing attorney with dispersements to be agreed upon. If its small stuff and my core parnters IE I have been doing deals with them for more than a decade I just fund the rehab up front.. makes for much easier book keeping for me. The other Issue from a HML perspective.. is many have raised funds through some sort of PPM so lets say they raise 10 million for their loan activies they are paying interest on it day one from when it comes into the PPM... So they set aside 200k for your loan they need interest on it day one or they are going to lose money on the loan based on paying the underlying interest on the credit facility.

    NOw I was when I was in the business blessed with Bank lending lines. and I only paid as they advanced.. So if I controlled rehab in my account I could make the float as I would not borrow off of my line until I needed it... With the size company we were 50 million borrowers were not worried that I would not have the draw funds upon demand... Like Jeff states smaller private type lenders who loan their own funds this is a real concern for the borrower and Jeff makes excellent points.

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  • Carl Devitt
    Investor · Glassboro, NJ · Member since 2014 · 7 posts · 2 votes
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    Awesome post.  In the future I intend to dive into the hard money pool and I will certainly watch for this submerged hazard....you've probably saved me hundreds or even thousands in the future.  Thank you.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Carl Devitt 

    I would be highly surprised if you were able to negotiate a HML were the lender did not charge interest from day one on the commitment not on actual funds in your hands.

    Need to go to banks for that treatment.

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  • James Kandasamy
    OP
    Real Estate Investor / Syndicator · Austin, TX · Member since 2013 · 210 posts · 135 votes
    11y

     I don't think we have to negotiate to get the lender B deal. There were some who just offered as the lender B way.

    For newbie's, just ask the question on how a HML charge It for this scenario and you will be able to make a better judgement on which HML to go with.

    James

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  • Account Closed
    Investor · Kansas City, MO · Member since 2010 · 239 posts · 110 votes
    11y

    There are other considerations too. For instance some HMLs charge a pre-payment penalty while others don't. Some HMLs charge a due diligence aka upfront fee to review the deal. Others have draw inspection fees. Points and interest can vary depending upon the area of the country you're in or the subject property is located. 

    All this said at the end of the day leverage is the name of the game in real estate investing. Many investors would say the ability to leverage OPM if the investor doesn't have the entire amount of funds needed for the deal is worth more than saving some interest or fees but not doing the deal to begin with.  HMLs often provide the type of financing banks do not (such as rehab loans) to real estate investors, and usually without much U/W or qualifying. Plus, the goal is not to keep it long, you want to get in, get out, make your money and move on. Regardless the type of financing you don't want to keep it longer than needed.

    2Reply
  • James Kandasamy
    OP
    Real Estate Investor / Syndicator · Austin, TX · Member since 2013 · 210 posts · 135 votes
    11y

    @Account Closed Completely agree with you on why we can use Hard money for leverage. I do that all the time. With regards to the other fee structures, the point of the post is to bringup up the missing print aka what some of them HML don't tell you or advertise.

    james

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