In an ideal world money would grow on trees, banks would be eager to lend thousands of dollars with just a signature, and my hair would stay in the faux-hawk all day long. Reality, however, is a different pill to swallow. If you are looking to get into house flipping but have little money of your own, chances are you will need to rely on the help of what investors call “Hard Money.”
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What is Hard Money & How Does it Work?
Hard money is a popular method of funding real estate on a short-term basis. A “hard money lender” can either be a single person, small local company, or large national firm that lends money to investors for short-term needs. While the rates and fees associated with hard money are varied, generally investors pay between 4-15 points (a point is equal to 1% of the loan amount) and between 8-15% interest rate. Additionally, these loans are due in full between six and twenty-four months after being issued.
Obviously, borrowing money at these rates and short term lengths are not conducive to a buy-and-hold investment strategy. However if your plan is to quickly sell or refinance the property, hard money may be a viable option. How do you find such lenders though? I want to look at different methods you can use to find hard money lenders in your area to help with your next financing.
8 Ways to Find Hard Money in Your Area
Ask a Real Estate Agent
Real estate agents are probably the best source for tracking down hard money lenders. While not every agent will personally have contacts with hard money lenders, the agents that move a lot of bank REO’s probably do. Keep asking agents until you find one that can get you connected with a hard money lender.
Ask a House Flipper
A great source of finding good hard money lenders is simply other investors doing the same thing. You can find other flippers by tracking down who is buying many of the “fixers” in your area via a real estate agent or country records.
BiggerPockets.com keeps a directory of hard money lenders on their website; Look through the list to see if there is one located near you. You can also look around on the Seeking Financing or Mortgages & Lending forums to see if there are any lenders in your area.
Some newspapers include a section titled, “Money to lend.” Often times a hard money lender will use this area to advertise for their business. Remember – a hard money lender needs you as much as you need them.
Over the past several years, many hard money lenders were forced to take back a number of properties in foreclosure. I personally know several hard money lenders who are using Craigslist to sell these foreclosed properties. Look for “For Sale By Owners,” and “handyman specials.” You may need to sift through a large number of duds but don’t get discouraged – it only takes one to fund a deal.
When in doubt — Google it. Last year I found a new hard money lender in Seattle by simply searching Google for “Hard Money Lender, Seattle.” This company turned out to be an excellent fit for the project and I now have another good relationship to call upon when needed.
Mortgage brokers are individuals who get paid to find you a loan. They don’t simply work for one institution but rather have the ability to search multiple sources to find the best fit for you. Most mortgage brokers do not have contacts with hard money, but some do. Note: this may be a more expensive route to take, as ofter times the mortgage broker’s fees will be added to your costs.
Create Your Own
While technically this last one is more in the category of “private money” than “hard money” the end result is the same. Use your contacts to find individuals who have excess money and are looking to diversify their investments and earn a solid return. Raising money for real estate is not something easy to do for a new investor (it requires significant amounts of trust) but it can be done and be mutually beneficial for both parties.
While not the ideal source for funding deals, hard money can close the gap between a dream and a deal. It is a tool to be treated carefully and with great consideration, as many wannabe investors have under-estimated repair costs, holding costs and turnaround time and as a result – lost big. However, if you factor in the high costs and short term nature of hard money into analyzing your deal, hard money can help turn your killer deal into a reality. Now, if only hard money lenders could keep my Faux-Hawk from falling down…
Have you used hard money before? What techniques did you use to find your source? Please feel free to share in the comment below!