- Hard money vs. Private Lenders vs. Mortgage Brokers
- Hard money lenders are creative because they are private
- How hard money normally work and can work
- What to look for in hard money lenders
- How to find hard money lenders through various means.
Hard money vs. Private Lenders vs. Mortgage Brokers:
- Hard money lenders are lenders that are private companies or people that use their own money to invest in real estate. They are currently investing in real estate and know what they want to lend on.
o Hard money lenders come in two categories: Private and conventional.
Private are just like they sound private and creative. Conventional are just like banks – hard to work with and plenty of hoops to jump through while pulling credit, checking income, and requiring a lot of paper work.
- Private Lenders are lenders that are private companies or people that use their own money to invest. They are most likely investing in CD’s, Stock Market, Money Market, Savings accounts, IRA’s, etc. currently. Because real estate is often a new investment for them there are laws associated with working with them.
- Mortgage brokers finance for long term purchases. If you plan to do quick cash deals these lenders are not usually for you. If you do a short term loan with a mortgage broker the mortgage broker will often be mad. Why? The bank they brokered the loan for will want the money paid to them from the bank back with other fees. The broker won’t work with you many times if they get hit with fees and have to return their commissions. Mortgage brokers usually take 3-4 weeks (31 days) to close.
Hard Money Lenders are creative because they are private:
- Because hard money lenders are private they get to decide what their money invests in, or not invests in. They do not have the stipulations that banks have.
- Banks are not in the business of holding properties. Banks want you to pay your payments and will only lend to those that meet very specific criteria. High caliber credit, long term borrowers.
- Hard money lenders on the other hand are not unfamiliar to owning property. They will take more risks in the borrower because they may make more money if they get the house.
o Hard money lenders are ok with more risk.
- Many say hard money lenders are too expensive and not to use hard money but they get the deals done and fast. Often times the speed of the hard money will allow you to get better purchase prices and beet out competition that does not close as fast as you may.
- Because hard money lenders work with their own money and not an institutions money they can do loan such as:
o Full Purchase
o Wrap closing costs into the loan
o Pay for fix up costs
o Take a second loan
o Take less interest while sharing profits
o Partner on deals
o Combinations of any loans
- One of the other major reasons hard money lenders are used is because they have cash. Cash can close in a matter of days and sometimes in just a day.
o This works well when doing short sales or other needed quick closes. In a short sale a lender may call you to accept your offer if you can close by the end of the month – which is in 4 days. Conventional financing cannot close this but hard money can.
Banks do this a lot. They have quotas to fill in selling foreclosures and will accept contracts on a whim – often days before the end of the month and you are to close by the end of the month.
What Hard Money Lenders normally do:
- Interest Rate: 12-18%, interest only
- Points (percent of loan amount): 2-5 points
- Term: 5 years or less
- 60 – 75 percent LTV or ARV
o The lenders can increase or decrease the interest, points, amount they lend, terms or anything with the loan. It is their money.
- ARV is After Repair Value. This means that the lender finances a percent of the value of the property or value of the home when it is fixed up.
- LTV is Loan to Value. This means that the lender finances a percent of the offer given on a home. This has nothing to do with the value.
o Examples of these are as follows:
Jane has a house she wants to buy for 150K. She offers 100K. A lender of ARV and a lender of LTV are financing 75%.
• The lender that is working with ARV will lend $112,500 (75% of $150,000 value is 112,500)
• The lender that is working with LTV will lend $75,000 (75% of $100,000 offer is $75,000)
The lender working with ARV would pay for 100% of the purchase for Jane. (It is important to note here that for hard money lenders there is no such thing as 100% finance loans. There are loans where they will cover 100% of your purchase if you purchase the home under their ARV percentage.) Her offer was $100,000. The lender would cover up to $112,500. Some lenders that work with the ARV like this will pay her money at closing also. In the scenario of Jane she could potentially get $12,500 for fix up or just money in her pocket.
The lender that works with LTV may not be bad because they may allow a second or even third loan on the property to equal 100% of the purchase and some LTV lenders will pay fix up costs.
What to look for in a hard money lender:
- I use a database in excel to keep track of all the questions that will follow:
o What is their interest charged
o What is the points they charge
o Do they require points to be paid at closing
o Will they take the point on the “back end” or as part of the loan
o Will they do 1st, 2nd, 3rd position loans
o Will they pay for fix up
o Do they work off ARV or LTV
o What percent of the ARV or LTV will they lend
o Will they allow you to make payments after you sell the property or every other month or quarterly
o Will they allow 2nd or 3rds after them
o Will they pay cash out as long as you are under the ARV
o What is their minimum and maximum amount financed
o Will they loan on residential
o Will they loan on commercial properties
o Will they loan on properties at the foreclosure auction
o What is the fastest they can close
o What is required to close quickly
o Do they require a credit check
o Do they require income verification
o What is the loan term
o Do they have a pre-payment penalty
How to find Hard Money Lender through various means:
o This is a hard way to find “private hard money”.
You will find a lot of “conventional” hard money lenders this way. Because the lender is on the internet with a lot of traffic they are very strict with how they lend.
- Newspapers / Penny Savers
o This is a great way to find lenders. You will need to watch the papers regularly. On occasion hard money lenders in your area will place an ad that they have money. Call these ads.
o There are also ads that say something like “pay day loans” these companies have a lot of money and will do hard money lending.
- Other investors
o Other investors may give you hard money lenders to contract
o You may go to a real estate club and find a successful investor. Get their name and take it to your recorder / clerk’s office and look the name up. See who is financing their deals. Take that name and call it. This does not hinder the investor but helps the hard money lender to finance more.
- County recorders / Clerks
o At the county recorder or clerks you can do searches for private people that have done loans more than once to people that do not look like their family. – Similar to looking up investors financer but you are just looking for people who have lent money.
- Foreclosure auctions
o You would go to the foreclosure auction and look for investors. At most auctions you need cash. Either the person bidding at a foreclosure auction has money or is using someone’s money
- Mortgage brokers
o Occasionally mortgage brokers will have contact to hard money lenders but most of the time they have contact to conventional lenders.
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125