by: David Whisnant
Would it help you as a real estate investor to be able to "Close For Cash in Days," even if you're tapped out financially?
Hard money lenders are perhaps the best way to get 100% financing with easy qualifying, money for fix- up, and fast closings.
So what can hard money lenders do for you? Hard money lenders make relatively short term (12-24 month) loans to real estate investors for the purposes of acquiring the property and rehabbing the property.
These loans are often funded by pools of private investors that have been grouped together into a pool of capital by a lender.
The hard money lender is looking for maximum return, and is willing to take more risk for this return in the form of easier lending standards.
If you strike the right purchase deal, you can even borrow 100% of the purchase price plus some or all of your repair money by using hard money lenders. Here's how it works.
Hard money lenders typically loan 65% of the ARV or After Repair Value of the property when it is repaired or ready for resale.
That 65% loaned by the hard money lender is calculated based on the value of the property AFTER REPAIRS, not as it currently sits, and not based on the price is being paid for the property.
For example, Say that the owner is willing to sell me his house for $60,000. The hard money lender's appraiser agreed with my assessment that the home could be sold for $100,000 once it was fixed up. That appraisal would allow me to borrow 65% of the $100,000, or $65,000. I'm only paying $60,000 for the property, so guess where that extra $5,000 goes?
Unfortunately, not into my vacation fund!
The extra loan proceeds go into an escrow account held by the hard money lender, and I can draw it out as I do repairs.
Remember, hard money lenders are not concerned with your personal credit to the level that traditional lenders are. They're concerned with the property. They know that their loan is fairly secure if you default.
What's bad about hard money loans?
The fees are higher than conventional financing.
Hard moneylenders in my area charge 15% interest, and 5% of the value of the loan in closing costs ("five points").
Thus, on a hundred thousand dollar loan, there would be $5,000 in fees to the lender to close the loan, plus attorney's fees and other charges.
Secondly, the loans usually are only good for 12-24 months. After that time, you have to refinance. If you haven't sold it by then, you have to get a new loan, pay more fees, etc. These are not loans to buy rentals with.
Another disadvantage is the fact that most hard money lenders don't figure the payments on a 30-year basis. The longer the payments stretch out, the cheaper the payment. They figure these loans on 15 or even 10-year terms. Thus, the monthly payment that you must pay is much higher than it would be on a conventional 30 year amortization schedule.
Also, hard money lenders are often more difficult to find than traditional funding sources. As a gift, I have compiled a national list of hard money lenders at my site to solve this problem for you.
Finally, most hard money lenders require a pre-payment penalty that must be paid if you refinance or pay off the mortgage before a given amount of time. Fortunately, this time period is often fairly short. For example, the hard money lender that I use has a two month pre-payment penalty period. Even if I am not going to do much work on the property, and have a contract on it quickly, I can just set up the closing for after the pre-payment penalty expires.
In conclusion, hard money lenders present an attractive option for investors to succeed without having to resort to the late night TV creative hype that we've probably all been exposed to. If you can qualify for traditional financing, and your seller is comfortable with a longer closing window, you may want to stay with conventional financing.
However, if down payment money is tight and your credit is not perfect, or you need to close very quickly, hard money lenders may be a viable solution since they will allow almost anyone who can find a good deal to purchase a property extremely quickly, with less red tape, get money for rehab, and have virtually unlimited access to cash.