The best real estate investment opportunities are often captured by investors who are prepared. Good deals present themselves sporadically and there are usually many interested parties. Real estate investors who need to move quickly often turn to hard money lenders for short-term financing. The benefits are real, but terms and fees can vary, so it’s important to understand how hard money lending works and when to use it.
HOW HARD MONEY LENDING WORKS
A hard money loan (HML), is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies and not difficult to obtain. It is actually much easier than conventional financing. Approval is weighted more heavily on the hard asset, hence the term “hard” money loan.
How is that any different from the financing provided to you on the house you live in, your homestead? Presumably, your home is not in distressed condition and is not as much of a risk to the banks. HMLs are typically issued at higher interest rates than conventional loans and are primarily based on the future value of the house rather than the current value of the distressed house. This is asset based lending. Because the house is distressed, the value (in the conventional lender’s mind) is more difficult to calculate and the loan is perceived to be more speculative and higher risk.
A HML is generally based on the after-repair value (“ARV”) of the house in contrast to the actual value (“AV”) of the house. A conventional loan is typically based on the AV which is quite simply defined as the value of the house “as is” at the time the loan is made either using the contract price or an appraisal of comparable houses.
The ARV, on the other hand, is calculated based on the value of the house after the estimated repairs are made on the property. This ARV is usually determined by an appraiser who searches for comparables of similarly distressed properties that have been rehabbed and sold in the same neighborhood within the last 3 to 6 months.
Hard money loans are typically set up with interest only monthly payments and a balloon payment due at the end of the loan term. As previously mentioned, interest rates can range from 12% to 18%, depending on the asset, borrower, and location. Loan terms range from 6 to 24 months and borrowers will pay points that can range from 3 percent to 10 percent of the loan amount. When the loan has matured, borrowers may decide to refinance into a conventional mortgage or flip the property to pay off the hard money loan.
BENEFITS OF HARD MONEY LENDING
A streamlined qualification process, quick closing, and minimal out of pocket expense are some of the many benefits provided by utilizing a HML.
The approval process for any HML is based on both the property and the borrower, but much less documentation is required from the borrower side. A HML is more weighted on the overall deal and the asset, which allows more borrowers to qualify for HMLs. Closing times for HMLs range from 3-15 days depending on the location and lender. A quick closing time is especially attractive to sellers and allows an investor to be more competitive when making offers. A HML is typically made at 70% of ARV. Depending on the purchase price and renovation cost, 100% of cost can often be included in the loan amount. A HML can minimize out of pocket expenses and enhance return on investment (ROI).
The chart below illustrates the difference between a conventional loan and an HML on a buy, rehab and flip investment. In this example, our investor is buying a home for $50,000 and needs to put $20,000 into the house in order to sell it for $100,000. The chart shows the basic fees and expenses associated with each type of loan based on averages. (Source: “Hard Money Made Easy,” by Longhorn Investments).
It is important to work with a reputable hard money lender who will guide you through the loan process while also providing feedback on the real estate deal. Ultimately, good hard money lenders want to be involved in successful real estate investment projects just like their investors.
ABOUT LONGHORN INVESTMENTS Longhorn III Investments, LLC is a hard money lender based in Dallas, TX. We were formed in 2008 to help provide hard money loans to the single family residential investing market in Texas. Since then we have grown to expand our hard money loan programs to multiple states along with doing hard money loans on multifamily and commercial investment properties. As a Texas based hard money lender we will fund both the rehab and purchase price of a property up to 100% of cost. Our complementary businesses include a title company in Dallas through Excel Title, and a real estate fund that operates in all aspects of single family investing.
To learn how hard money can help you, email at info