Work With Hard Money Lenders With Ease

I am filling you in on everything you need to know about hard money lenders. You can make it work! For many, securing capital for a real estate investment can be daunting. What if you can’t find a lender? What if you get taken advantage of by the lender? What interest rates are typical? While working with a lender can be intimidating, know that this is a common avenue for real estate investors. Working with a hard money lender can be painless, quick and easy task. Let’s get started!

Hard Money Lenders and Hard Money Loan

First, let’s define a hard money loan. Hard money loans, also known as bridge loans and private money loans, are loans made for the purchase of real estate set for a period of time. The loan is based on collateral of how much the property is worth. The loan can last anywhere from a few months to five years. Some loans end in a balloon payment, which means a large sum of money will be due at the end of the loan period. 

What are Hard Money Lenders Like?

Hard money lenders tend to work with real estate investors who fit a specific niche. Flippers work with hard money lenders the most. The lenders may cover a portion of the cost of the original home, and some may even cover the rehab costs as well. 

These lenders are attractive for flippers to work with because they can get them money much more quickly than a bank. When you are bidding on a popular property, being able to provide the funds faster than the other bidders makes you a better candidate. 

Flow of Cash is important to hard money lenders
Cashflow is important to hard money lenders.

They are also attractive if you have poor credit. The reason why a hard money lender doesn’t care about your credit is because they only care about the collateral of the property you are buying. These lenders are experienced in working with flippers so they would know exactly what to do with the property if you end up defaulting. 

How Does the Financing Work?

As I stated earlier, hard money lenders are a great alternative to a bank. They differ from banks in many ways, such as their interest rates, points and how they determine the amount of money they will lend you.

First, there are two ways lenders may decide how much they will loan you. The first is based off of LTV – Loan to Value. That means they will lend you a percentage of the cost for the original price of the property. If it is a rehab, they may base it off of ARV – After Repair Value. Either way, you will receive between 60%-75% of that set amount. 

Second, you should not expect a hard money lender to fund everything in the deal. A lender is going to want you to be vulnerable, too. Think about that and your own ability to fund investments before approaching a lender.

Interest rates should be considered well
Interest rates are on the high side with hard money lenders.

Third, you can bet that there will be a high interest rate associated with the loan. Expect it to be between 7%-15%. While that seems incredibly high, realize that these lenders are putting a lot of faith in you and want to make sure they get their return on investment. Time is also money. Remember that some lenders will be able to turn this loan around for you in as little as a week. 

Fourth, there are also points to consider. Points represent percentage points of the total loan. Points are due upfront. Again, this may seem like a lot of money, but they do this to mitigate risk. 

Overall, hard money lenders are expensive. But you’re paying for ease and speed. It is certainly worth it for many real estate investors.

How Do I Find a Hard Money Lender?

Finding a hard money lender is easier than you think. Besides, they want to make deals too, so they’ll make themselves known. You can find them at local networking meetings or you can ask friends in the industry. Another way to find a lender is by doing an internet search. Google “hard money lender” and “Houston,” for example, for websites of lenders in Houston.

What’s the Loan Process? 

The loan process is similar to a bank loan process. The lenders want to go through a series of steps to make sure it’s the right fit. This process is just as important to you as it is to them. Do not hesitate to ask many questions along the way and make sure you feel good about the partnership as well.

Presentation skills are well appreciated
Prepare your presentation. This is a plus-factor.

The first step in the process will be your pitch. You want to be over-prepared. Know all of your facts & figures, have pictures of the property, know how much the repairs will cost, etc. The more prepared you are the more likely the lender will feel that s/he can trust you and go into business with you. And don’t be surprised if they want you to be very open about your financials. They have to know who exactly they’re about to do business with, from your tax returns to your college debt.

The next step is the appraisal. The lender will send their own team to look at the property and confirm you numbers and do their own research on the property. They’ll want to determine on their end that it is a sound investment after all.

After that, if the lender is confident in you and the property you’ve chosen, they will underwrite the property and then you will close the loan. This is obviously a very simplified breakdown of the process, but again it can tend to happen quite quickly since time is of the essence in real estate deals.

In Conclusion

Overall, working with hard money lenders is easy so long as you approach it with your best foot forward. Have all information that’s needed ready to go for their review. While finding a lender is easy, make sure to qualify your lenders. Are they local? Have they been working in this industry for a long time? It’s helpful to meet your lender through connections although this can be hard to do when yo are just starting out. 

Do you have any further questions about hard money lenders that I didn’t cover in the article? Share your questions in the comments and I’ll respond as quickly as I can!

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