What are Hard Money Lenders?
Hard money lenders are basically private individuals or companies who lend capital in order to finance real estate transactions for business purpose (i.e., flipping houses or buying rental property). Hard money lenders fill the void that banks and traditional lenders refuse to do, by loaning on distressed properties and providing the funds necessary to rehab/renovate a property. Hard money lenders offer programs with rates, terms, and fees that are generally higher than traditional loans, due to the fact that there are more benefits by using hard money.
What is Hard Money?
Hard money is a type of real estate loan that is an alternative form of financing. Hard money loans are based on property value, and also on the borrower’s credit worthiness. They are designed to provide funds for the acquisition and also for the repairs. Most hard money loans have a higher LTV (loan-to-value ratio) than most forms of traditional financing, allowing a borrower to leverage more of their own money, and bring less to closing.
What are the Benefits of Using a Hard Money Lender?
There are many benefits to using hard money, but the two most important ones are faster closings and the use of leverage. Depending on market conditions in your area, most investor real estate transactions require a fast closing. This means closing on the purchase usually in less than two weeks. Some deals need to close in less than a week. If you have a deal like this, your only option is to pay cash or finance the deal with hard money. No bank or traditional mortgage lender can close this quickly.
Second to closing quickly is the ability to use leverage. This means using less of your money and more of someone else’s. Real estate is one of the only investment vehicles where higher leverage like this is allowed. Hard money lenders will generally loan up to 70% of the after repair value for most deals.
For example, assume you are looking at a property with an ARV (after repair value) of $200,000, which has a rehab estimated cost of $50,000, and a purchase price of $110,000. Most hard money lenders will loan 70% of the ARV, or $140,000 in this example. If the subject property is going to be kept as a rental property, some hard money lenders will loan up to 75%. That’s because these transactions offer lower risk to the lender, since the refinancing a loan is usually much faster than marketing a property for sale.
How to Find Hard Money Lenders
A quick Google search using the phrase ‘hard money lenders Houston’ will likely show a number of potential lenders in that area you can use. Your local Meetup group or REI (Real Estate Investor) club is a great way for you to find a reputable hard money lender. Networking with like-minded people at these meetings or events will help you find the lender, as well as other resources you may need, to have a successful deal.
You can also search on the American Association of Private Lender’s website. Members of this national organization agree to follow a code of ethics that was developed by experienced lenders.
What to Look For in a Hard Money Lender
Here are some key traits that every reputable hard money lender should ideally have:
- Expertise
A hard money lender should have expertise not only in real estate financing, but also real estate investing. There should be at least someone on the hard money team that can provide real world experience in rehabbing property, flipping property and/or renting property. You will gain tremendous value beyond just the loan by using a hard money lender with this type of experience, as they can help you evaluate your deal and make sure the returns you are expecting are actually achievable.
- Speed
As the availability of deals has transitioned from MLS to wholesale in many markets, the ability to close quickly is a competitive advantage. A hard money lender should have the resources in place to approve your application quickly (usually in less than 24 hours), get your deal evaluated, and process and close in a relatively short time frame. Hard money is very similar to a cash transaction in this regard, and gives the borrower the same advantage when making an offer.
- Transparency
Trustworthy hard money lenders will fully disclose all of their fees, rates, and terms of the loan that they are offering you. By doing a little homework, you should be able to quickly determine if you are working with a reputable lender that you want to fund your loan. Also, a good hard money lender will treat you professionally and be very respectful of your current situation and financial goals.
Evie harrison is a blogger by choice. She loves to discover the world around her. She likes to share her discoveries, experiences and express herself through her blogs. Find her on Twitter:@iamevieharrison