Does hard/private money make sense for fix and flip?

Question

Benefits of a hard money loan:Why would

anyone opt for a hard money loan from a hard money lender instead of

getting a mortgage through a traditional loan from a bank? Because hard

money loans are less of a hassle than those from traditional lenders,

especially when it comes to real estate investments. The flip side? Hard

money loan rates are a little bit higher, and you borrow the money

for only a short period of time (which makes sense).

Hard money lending is popular for the following people:Flippers:

If a house in comes on the market and it looks like it could be fixed

and flipped in a few months, most borrowers prefer not to go through the

hassle of taking out a 15 to 30 year loan on the property. Instead they

take out a fix-and-flip loan, aka a hard money loan, to buy and

renovate the investment property with an aim to repay the lending party

for the money loan within 1-12 months. Builders:

Many contractors use hard money to buy a lot, build on it, and then

sell the new real estate and pay off the loan quickly. Real

estate investors: On occasion, a real estate investor will come across a

great deal on a property that needs to be snapped up quickly. If the

real estate investor doesn’t have the money on hand to snag the asset, a

loan that’s short-term can be fast-tracked by a hard loan lender, who

is, in effect, a real estate investor as well. People

with credit issues: Borrowers who have cash on hand for a down payment

for what will likely be an owner-occupied home but have been rejected by

a bank for a conventional loan—or have had a foreclosure, default, low

credit score, or other red flags on their credit report, but have some

cash on hand—can use hard money to buy a property that would be

unavailable to them otherwise.

Chris Seveney · Answer

When we lend to investors, we will lend to those who are looking for it for ease and not necessity. As you mention some people are desperate to get money or force a deal. That is not someone you want to do business with.

As an example we did a loan on a property that was over $100k but the property has plenty of coverage. The borrower called us a few weeks later asking for a seven figure loan and was very pushy. They wanted to over leverage an asset. Like many people today, this person is in a cash crunch and does not want to liquidate the asset (it was office property) because they would get pennies on the dollar. While we are protected on that other loan, this loan would have been extremely risky and was a no go for us. Be careful who you lend too. As i mention, its better to lend to those who want it for convenience not as a last resort.

Benjamin Riechmann · Answer

I believe there is a side note here not spoken about.  The money made in a deal is made at the purchase. If the numbers don't work it does not matter what lending source you use.  Some deals, although harder in this really high market, may be more contingent on how fast you can get that deal done.  I had one house if I could not move on it quick I would have missed out.  I had access to other lending sources, but it would have taken to long to get that deal done.  Everyone involved in that deal knew it was a good deal to be had and I had the track record of getting good deals done.  As Chris states though, if I am trying to do a deal as I am desperate to just get it done it is unlikely that anyone will want to give me funding.  If they do want to give me funding in a state like that, it is more likely that I will end up in a worse situation rather then a better one.

It is good to dig you well before you are thirsty.  Have more than one avenue to get money on a deal.  Even if you go through traditional bank lending, you may hit a point where that becomes hard for any number of reasons and it would be good to have other source built up and ready to go if you are going to expand.  If you can't use that person right away, it is good to bring them business if you can so they don't lose interest.  I have even gotten clients that way that became one of my side businesses.