Finding hard money lenders isn’t really a mystery. At least it isn’t a hard mystery to solve. You just need to get out there and take the right steps toward uncovering them. There are many different ways their investors, attorneys, accountants, insurance agents, etc., who are generally to locate hard money lenders or private lenders. When talking with other professionals, I tend to refer to my lenders as “private lenders” simply because not everyone is familiar with the term “hard money lender.” I have found most of my lenders by asking for referrals from others willing to help me because I do what I can to help them.

Some of my favorite people to ask are settlement/closing attorneys. They usually prepare the loan documents for hard money lenders and most attorneys will be able to give you at least one name. In fact, on a number of occasions the attorney whom I asked for a referral was a hard money lender themselves.

Accountants are also a good source for hard money lenders since they have clients who are sitting on a lot of cash and need to do something with it. In some cases, they even have clients who already hold paper. Such people are great to approach about lending money since they already understand the business of lending. They have either taken back paper upon selling a property or they have lent their own funds to someone.

Real estate paper is a very secure investment, and people who understand the business of lending don’t mind doing real estate loans, especially when the LTV is low and the interest rate is high. If someone trusts their accountant enough to let them handle their finances, then a referral from an accountant should carry a lot of clout. Another method of finding hard money lenders is to write down the addresses of homes undergoing renovation.

With few exceptions, if I go to the courthouse with ten addresses to uncover the lender involved in each of these renovation projects, you will find that a private lender is funding at least one of them. Contact the lenders that you discover and get to know them, especially if they have already lent money on a home in an area where you want to invest.

Insurance agents who sell hazard insurance policies (particularly those that specialize with investment properties) have to put a “loss payee” on all of the policies where a lender is involved. The loss payee is the lender, so the insurance agent can tell who are private lenders and which ones are not. An active agent could probably go through their records and come up with dozens of names of people who have lent money privately on policies they have written.

Mortgage brokers can also be a good source for locating hard money lenders, particularly those that work with investors on a routine basis. I personally feel that any mortgage broker that deals with investors should have a hard money lender in their bag. If they don’t, I wouldn’t consider them a good mortgage broker. You may have to pay the mortgage broker a fee for the referral, but it is worth it if it means getting a deal done. Increasing your chances of finding a hard money lender has to do with the circles that you run in, the people whom you ask, and the number of people you ask.

Chances are if you are asking the cashier at your local convenience store if they know of any hard money lenders, the answer you get is going to be, “Huh?”. If you ask an attorney or title company who works with a number of investors in your area, it is much more likely that you will find someone who will be able to provide you with the names of several lenders. If you don’t get anywhere the first time, don’t stop asking people until you find one.

Private or “hard money” lenders are private individuals with surplus money available for investment. Some have deep pockets while some have limited resources. Based upon their own personal criteria, they lend this surplus money, primarily on a short-term basis, to real estate investors who use it for a variety of profitable purposes including buying and repairing distressed properties.

Why is it called “Hard Money”?

Don’t be confused by the term “hard money.” It doesn’t mean that this money is difficult to find or obtain. Actually, it is some of the easiest money to procure. So why is it called “hard” money, you ask? Good question. In the world of finance, money is either “hard” or “soft.”

Hard money has stricter terms and a clearly defined repayment schedule. Softer money has easier terms and a more flexible repayment schedule (e.g., debt service subject to available cash flow). In the case of private financing, the terms for hard money loans are exceptionally harsh with very low loan to values (LTV’s), higher than market interest rates, and a lot of upfront points.

Typical Terms for Hard Money Loans

Terms for these types of loans will vary from lender to lender and will depend upon the experience level of an investor as well as the length of an investor’s relationship with a particular lender. Generally, a hard money lender will provide a loan for 50-75% of the after-repaired value of a home at an interest rate of 12-18% for a period of 6 months to five years. They will also charge between 2-10 points as an upfront financing fee.

As you invest, you will discover that these terms will vary from lender to lender. Some will only charge interest while some will amortize their loans. Some will lend repair money; others won’t. Some will place the repair money in escrow to be drawn out as the work is completed; others will let you leave the settlement table with it. Some will lend closing costs; some won’t. Ultimately, when finding hard money lenders, you will need to determine their terms and how they might fit into your plans as a wholesaler.

Lending Criteria for Hard Money Lenders

Like terms, lending criteria also varies from lender to lender. Each has their own preferences with regard to areas in which they will and will not lend and types of investors to whom they will and will not lend. Some will check your credit, some will not. Some will do their own appraisals, some will not. Some will charge for an appraisal, others won’t. Some will charge an inspection fee for each draw from the repair escrow, others won’t. Some will only lend in certain areas while others will lend everywhere.

Some are more numbers-driven when it comes to decision-making while others go more on their feelings about you and/or the neighborhood. What about my credit? With terms so favorable to the lender, most hard money providers are concerned primarily with the value of the property, placing less emphasis, if any, on the credit of the payor. They just want to know that in the event the payor defaults they will possess an asset from which they can extract their original investment and possibly more. However, this is not to say that lenders desire to go through the hassle and expense of taking back and reselling a property but merely to point out that due to the terms of the loan, private lenders are secured, and feel secure, whether a borrower pays or not.

Hard Money Lenders Are People, Too

You must keep in mind that most hard money lenders are private individuals. They are not institutional investors who have a set standard of guidelines dictated by the federal reserves. They can be flexible, they can be tough. They are people just like you and I. You can talk to them. You can befriend them. You can laugh and joke with them. They can be your neighbor, your doctor, your attorney, or your bus driver. They usually don’t advertise that they lend money, but instead are found through word of mouth.

A Great Resource

Hard money lenders are a great resource for real estate investors, particularly a beginner with limited resources (e.g. cash and credit). Having a hard money lender on your team enables you to confidently make offers on properties. It enables you to purchase properties when your offers get accepted, and it provides you with the funds necessary to do the repairs if needed. In fact, I have heard of some cases where individuals have even been able to borrow holding costs, but I have never met any lenders myself who will actually do this.

If you invest in real estate, you need cash to buy houses. Even if you have a full bank account and great credit, you’ll eventually run short on funds – or short on time to obtain a loan – for the next deal. Private lending is the answer. It is a bottomless pool of readily accessible funds: whether you have great credit or poor; whether you have cash reserves or not. “Private Lending” refers to the process of borrowing real estate investment funds from private individuals at rates higher than these lenders can normally achieve in the marketplace. The attraction of private lending is the speed and ease of funding a deal.

Here’s how it works…first you find or do marketing to find individuals interested in earning 10-12% interest (or whatever you deem affordable for you and attractive to others) on investments secured with real estate. You’ll find these prospects everywhere. They belong to your local investors association, your church, your civic club, they’re your friends and family, your neighbor next door. You’ll be surprised how easily you’ll locate them, and soon, they’ll be searching you out. Just let everyone know that you pay high interest for their loans on your real estate projects.

As prospects express interest explain that the investments are secured by real estate and do not exceed 75% loan-to-value (LTV) of the after repaired value of the home. Each investment is based on a specific property, and they can decline any property with which they are not comfortable. All you require is that they approve quickly (within 48 hours), and can fund within 7-10 days or less. Once they have approved the investment, the funds are wired to the closing attorney to be held in escrow. After the closing, the lender will receive a Promissory Note from you (either personally, from your business entity, or both), a Deed To Secure Debt (mortgage) on the property, lenders’ title insurance, and listed as a mortgagee on the hazard insurance policy.

If no single investor can fund the entire investment, then piece several loans together by providing the largest investor with a first position mortgage, and each smaller investor a progressively subordinate (2nd, 3rd, etc.) mortgage. Typically, we pay an additional percentage on the interest rate to entice investors who accept subordinate positions. The advantages of private lending are that there is a minimal approval process, and so availability of funds is quick. You pay interest only, instead of also incurring a loan origination fee commonly known as “points”. You are never constrained by arbitrary rules as to how many mortgages you can have in your name. In fact, none of these mortgages ever show up on your credit report. In turn, the private lendor receives a higher interest rate with a very secure investment. Everyone wins!

Now you may be wondering how many people you know really have $75k -$100k -$150,000 just lying around ready to invest. More than you think – and most of them don’t even realize it! That’s because the money is tied up in their IRA’s which they believe can’t be accessed until retirement. That’s only half true. They can’t personally withdraw the money without suffering penalties; but they can invest their funds (and receive your interest tax-free! If it’s a ROTH IRA) if they rollover into a self-directing IRA. A self-directed IRA is administered by a third party institution and allows the IRA owner to make decisions relative to the investment of the funds. In other words, the IRA owner can decide to use his IRA funds to make a real estate investment in your property. Most people do not even realize this as a possibility. They believe their money must stay tied up in an IRA until retirement earning nominal interest. Imagine how thrilled they are when you provide this alternative! Imagine how much money is currently sitting in traditional IRA’s that you could tap into. There are more funds available than you can use. Isn’t that a nice problem to have?

I ensure that making a loan is as simple as possible for my private lenders. I prepare all of the required documents so all they have to do is sign and fax it. From that point on, the private lender has nothing else to do. Simple. Easy. Their next task is approving the payoff when the loan is re-paid. Because the loan process is so simple, and the interest rate so favorable, investors are always begging to re-invest. This truly is a bottomless pool of investment cash. Don’t forget that if you have cash in an IRA, you can also increase the interest you’re earning by becoming a private lender. You can not invest in any property or company in which you or your family have a vested interest, but you can invest in the projects of other investors which you know and trust. It’s a great way to leap frog your IRA.

It used to be, just 9 months ago, that any rehabber with a pulse that could find a house to purchase for a price of 70% of the After Repaired Value (ARV) including the cost of repairs, could find financing with a Hard Money Lender (HML). As many of you well know, that is no longer the case. HMLs are now looking at the strength of the borrower as well as the viability of the deal. Why has this come to pass? What does it mean to rehabbers? How will this impact the market? Let’s find out.

So why have HMLs, for all intents and purposes, become “full doc” lenders? Necessity! When the markets were hot and any buyer with a pulse and a 550 mid score could get 100% financing from a “stated” sub-prime loan program, HMLs did not care what their borrowers looked like on paper because every deal flew off their books. Every investor was making money on their Fix-&-Flips, even with shoddy finish-out. HML’s were not worrying about foreclosing on their borrowers. In the rare occasions that they did have to foreclose the property was sold almost as soon as they got it back on the court house steps.

Then it happened. The credit markets tightened up and almost overnight the financing for retail buyers disappeared. Suddenly the rehabbers were holding onto their loans longer and, as the realities sunk in that they might not be able to sell their investment house, some began to default on their loans. All of a sudden HMLs were faced with borrowers who were not making their loan payments and, due to their credit and finances, these borrowers were unable to refinance the loan with a traditional lender. Some borrowers even went as far as removing new appliances and HVAC from the houses which were paid for by the HML as part of the rehab process. This meant the HML would have to foreclose if he wanted to protect his collateral. No longer was the deal alone sufficient underwriting criteria.

So what does this mean for Rehabbers? Well, it means that we HMLs are going to look at you as the borrower, as well as the rehab itself. It means that the days of easy money are gone and, in many, if not all cases, you will have to prove you can support this loan as well as have some “skin in the game” in the form of actual cash in the deal. Equity will no longer be enough. What will this look like? After talking with most of my fellow local HMLs and discussing their current underwriting guidelines, I have come-up with the following range of underwriting criteria:

* minimum credit score: 600 – 650 Mid Score

* cash on hand: 5% – 10% of loan amount

* 2 – 4 months bank statements showing cash on hand and few if any NSFs

* last 2 months pay-stubs if employed

* last years W-2 and tax returns if self employed

* property location: no busy streets or other issues.

Bottom line: we HMLs are now “cherry picking” the best deals to do each month. Volume is no longer the name of the game. Finding borrowers who will not default on their loans IS the new name of the game.

So what does all this mean for you? Well if you have “bad” credit, find a co-borrower that has “good” credit. It means that you need to have sufficient cash reserves on-hand. If you don’t have the cash, find a co-borrower that does. Look closely for deals that are “no-brainers”. Make sure that you have a solid “bulletproof” exit strategy. Know your comps. Find and buy only houses that will sell fast and are located in areas that are holding value. Don’t cut corners on your rehab to save a few bucks. Your HML will not reimburse you for those shoddy repairs, nor will buyers accept them. There is too much inventory for buyer’s to choose from now. They can afford to be picky.

There is still money out there for rehabbers. There are still ways for rehabbers with marginal credit to buy and rehab houses. There are still “direct” HMLs making loans to qualified investors on qualified deals. However the deals need to be rock solid and so too must the borrowers.

The best place to get short-term money is through mortgage brokers, who know what will work and what won’t. They know what they can get on the market today. Some will have access to private funds that require no qualifying by the borrower. Equity in the house is the only concern.

Brokers can be a valuable asset. Remember, when I started I had no credit. I had no choice but to use whatever funds where available, so I found a broker who would loan 50% of the appraised price regardless of my financial condition. The cost was high, but the rewards made it worth it.

He charged me 10% of every loan I made, and I paid 18% interest. I know this sounds high, but I soon learned it wasn’t the cost of funds that count, but the availability of them. Because I had access to these funds, I simply bought up junkers with them and made thousands of dollars in profit on each house.

Let me ask you a question. Would you rather pay a mortgage broker 10% of your loan or pay a partner 50% of your deal? Tough choice, isn’t it?

Mortgage brokers work on a commission. They do not get paid unless you get paid. If you use private money, get used to the idea of paying high points and consider it a cost of doing business. We can get a high interest loan and still make money. Remember, it’s not the cost of the money that matters. It’s the availability that counts.

When I first started, I borrowed on 76 loans at 18% interest, 50% loan-to-value ratio (LTV), 6 months interest prepayment penalty, 7 year balloon payment and 10 points up front to the broker. And I still made money on every single one of them!

How It Works

If the house needs repairs, you may not get all the money at once. Some of it may be escrowed for repairs. For example, suppose you get an offer accepted for $15,000 cash on a property whose value after repairs is $45,000, and the “as is” value is $35,000, and the estimated repair costs are $4,000.

We know we can get a loan from a private investor for 50% the fixed up value of the property.

Value After Fix Up
$45,000

As Is Value
$35,000

Repair Estimate
$ 4,000

Maximum Loan Amount
$22,500

Cost of the Loan
$ 3,000

Net From Loan
$19,500

The problem is that the loan is based on the after repaired value. The broker will write the loan for $22,500. You’ll pay the cost on $22,500, and you’ll start paying interest on $22,500 as of that day. But the broker will escrow 50% of the difference between the “as is” value ($35,000) and the “repaired” value ($45,000).

The escrow amount would be 50% of the $10,000 difference because it is a 50% LTV loan. So $5,000 will be held in escrow until the work is completed. After the work is done, the mortgage broker will send an appraiser out to look at the finished house and, if all the work is completed, he will give you the $5,000 held in escrow.

In the above example, we needed $15,000 cash to buy the house and $4,000 to repair it, for a total of $19,000. But we are only going to get $14,500 from the loan at closing, so we would construct our offer this way:

Q: “Mr. Seller, I’m going to give you $15,000 for this house. I’ll give you $10,000 at closing and $5,000 within 60 days. Will that be alright?”

A: “Yes. That would be OK.”

To ma ke this work, the seller will hold a second mortgage for 60 days because we obtained the first mortgage from a private investor through the mortgage broker. This is known as “subordination” and is a useful tool for any investor.

This way, we are fully protected. We would get $14,500 from the loan proceeds, give the seller $10,000 of it, and still have $4,500 left over for repairs. Since we only need $4,000 for the repairs, we get to keep the extra $500.

Generally, the money mortgage brokers find comes through private individuals. A private investor is very different from a bank. There is none of the usual verification ordeal. The only verification is the value of the property.

You do not need good credit, these loans are not reported on your credit report, and there is usually no qualifying. They don’t care about your personality or personal history. Their only consideration for the loan is the loan-to-value ratio. The length of the loan may vary but, generally, they will amortize the loan for 15 years and call it due in a balloon payment in 5 years or less. Private short term money like this is very valuable to us as investors. This is the kind of money that can make you rich!

Many consumers assume that “mortgage companies” are banks that lend their own money. In fact, a company that you deal with may be either a mortgage banker or a mortgage broker.

A mortgage banker is a direct lender; it lends you its own money, although it often sells the loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.

A mortgage broker is a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).

Using a mortgage banker can save the fees of a middleman and can make the loan process easier. A mortgage banker can give you direct loan approval, whereas a broker gives you information second-hand. However, many mortgage banks are limited in what they can offer, which is essentially their own product. In addition, if you present your loan application in a poor light, you’ve already made a bad impression. I am not suggesting you lie or mislead a lender, but understand that presenting a loan to a lender is like presenting your taxes to the IRS; there are many ways to do it, all of which are valid and legal. Using a mortgage broker allows you to present a loan application to a different lender in a different light (and you are a “fresh” face).

A mortgage broker charges a fee for his service, but has access to a wide variety of loan programs. He also may have knowledge of how to present your loan application to different lenders for approval. Some mortgage bankers also broker loans. As an investor it is wise to have both a mortgage broker and a mortgage banker on your team.

SIDE NOTE: MORTGAGE BROKERING. Keep in mind that mortgage brokering is an unlicensed profession in many states. If there is no licensing agency to complain to in your state, make sure you have personal references before you do business with a mortgage broker.

Choosing A Lender

Choosing a lender that you want to work with involves several factors, not the least of which is an open mind. You need a lender that can bend the rules a little when you need it and get the job done on a deadline. You need a lender that is large enough to have pull, but small enough to give you personal attention. And, most of all, you need a lender that can deliver what it promises.

1. Length of Time in Business

Since the mortgage brokering business is not highly regulated in most states, there are a lot of “fly-by-night” operations. Bad news travels faster than good news in business, so bad mortgage brokers don’t last too long. Look for a company that has been in business for a few years. Check out the company’s history with your local Better Business Bureau. If mortgage brokers are licensed with your state, check to see if any complaints or investigations were made against them. Also, ask for referrals from other investors and real estate agents.

2. Company Size

A company that is too big can be problematic because of high employee turnaround. Also, the proverbial “buck” gets passed around a lot. If you are dealing with a mortgage broker, it is often a one-person operation. Dealing with a one-man operation may be good in terms of communication if he or she is a “go-getter.” On the other hand, the individual may be hard to get a hold of, since he or she is answering the phone all day.

A small to mid-sized company is a good bet. You will be able to get the boss on the phone, but he or she will have a good support staff to handle the minor details. Also, a mid-sized company may have access to more wholesale lenders than a one-person company.

3. Experience in Investment Properties

It is important to deal with a mortgage broker or banker that has experience with investor loans. Owner-occupant loans are entirely different than investor loans. And, it is important that the broker or lender you are dealing with has a number of different programs. It is often the case that you find out a particular loan program won’t work, in which case you need to switch lenders (or loan programs) in a heartbeat to meet a funding deadline.

Financing Without Banks: What You Should Know

A new trend dubbed “peer-to-peer” financing is emerging in the crowded real estate financing arena and it’s already more common than most people think. Simply, instead of borrowing money from a bank or other financial institution to purchase a home or small business, private individuals become the lenders. Surprisingly, this “new” trend isn’t so new at all. People have been lending money this way for hundreds of years. Before banks, if someone wanted to buy a wagon from their neighbor, or even a local merchant, the buyer and seller simply agreed to the price and the terms, and the buyer made installment payments directly to the seller. No bank or lending institution was involved. Today, these simple and effective financial arrangements are making a comeback.

The Untapped Peer-to-Peer Lending Market: Cash Flow Notes

Private financing is an attractive option for many transactions, particularly real estate. Now a $350 billion industry, peer-to-peer seller financing is a growing, global phenomenon. Already, the sale of most small businesses incorporates peer-to-peer lending and one in 13 American homes is purchased using these cash flow notes. Currently, there are approximately $91 billion in privately held single-family residences and another $200 billion in commercial real estate notes. In fact, there are so many cash flow notes in the U.S. alone that if you could find and purchase $1 million worth of notes every day, it would take more than 240 years to find them all.

Two Ways to Make Money

Many private lenders would sell their notes if they knew the option existed-just like banks do every day. This creates an enormous profit potential in a hugely untapped market. Most people get started in cash flow notes by simply matching a seller-someone who’s holding a note-with a buyer and then collecting a fee for putting the deal together with no capital outlay required. Additionally, many investors are looking to buy these notes. It is not uncommon to receive returns of 20 percent or more as well as immediate monthly cash flow. Because these notes are secured by real estate, they are extremely safe investments. Today, thousands of people all over the country have tapped into this trend and are making a full- or part-time salary in the cash flow note industry.

You’ve spent the last 4 months trying to get your client a mortgage on his investment property. You gathered all his personal, business and real estate financial information, for not only the property you’re trying to finance but for all his business and property interests. You’ve done projections, forecasts and read through 200 page appraisals. You’ve put together a loan package, sent it to numerous commercial mortgage lenders, only to find out each one needed the same information filled out on their particular unique forms. So you’ve spent dozens of hours more transferring the same information to tens of different applications. You’ve spent numerous hours obtaining “additional information” for each potential interested lender. And now you’ve exhausted all possible institutional mortgage sources and still no loan.

Sound familiar? Perhaps you’re new to the commercial mortgage field. You have been successful originating residential loans, took the NAMB Commercial Mortgage course and decided to expand your practice to include commercial and investment property mortgages. Or maybe you’re already a commercial mortgage broker, successful in obtaining financing for some clients, but feel you just spin your wheels trying to obtain financing for others. The key to spending your time more productively is to understand when institutional commercial mortgage money is NOT available for your client. The key to earning a commission from these same clients is to understand what type of financing may be available for this same client.

Private mortgage loans are loans secured by real estate made by a private lender instead of a bank, lending institution or government agency. Private mortgage loans are short-term (ranging from six months to three years) hard money or asset based loans made to the professional real estate investor for the purchase, rehabilitation or equity cash out of real property. This means that the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrowers credit. The security for the loan is enhanced because the loan represents a maximum of 65% – 70% of the appraised value of the income producing property. On non-income producing property (raw land, lots, construction money) a maximum of 55% loan to value is lent. Investors can expect to pay interest rates of 12% to 14% on first liens and 16% to 18% on second liens in this current low interest rate environment. Historically first lien yield of six points over prime has been obtainable.

Why are real estate investors willing to pay high rates to borrow private money?

When interest rates of 14% to 18% are added to four-to-eight points, the real estate investor/borrower is paying 20% plus annually for the money borrowed. Its obvious why this is a good deal for the private mortgage lender, but why should real estate investors be willing to pay these high rates when conventional mortgage money costs 7% to 10%? There are many reasons, but all fall into four categories.

Qualifying Problems

The real estate investor/borrower and/or the real property does not qualify for an institutional mortgage loan. This can be anything from low borrower credit scores or too much borrower debt, to the borrower’s properties not producing a sufficient enough income. Further, the property itself may not support the type of loan the borrower wants. Many institutional lenders will not loan amounts under $500,000; many will not lend second lien money even if there is significant equity in the property. If major repairs or rehabilitation is necessary, institutional lenders will not be interested unless the project is very large and the borrower has an extensive track record. In these cases the private mortgage lender may be the only resource available for the real estate investor/borrower.

Institutional lenders are concerned with both the appraised value of the property and borrower and property credit. Private mortgage lenders are only concerned with the appraised value, as long as the appraised value represents a fair market price. Hence, if a property is producing or can produce sufficient income to pay the note and the value of the property will fully secure the note and provide sufficient equity, then the borrower’s credit is not an issue for the private mortgage lender.

The Need For Speed

Speed of closing the transaction. Mortgage money obtained from banking or institutional sources, called conventional mortgage money, usually takes between 60 and 90 days to fund. Institutional lenders need not only obtain appraisal of the value of the property, but also require detailed examination of the borrowers credit history and current financial status, as well as financial statements and tax returns, not only for the property collateralizing the loan but for all real property and business interests owned by the borrowing entity and the borrower himself.

Private mortgage lenders on the other hand can usually complete a transaction within seven-to-10 days. Since the property itself is the main criteria to be used to determine loan eligibility, much less information on the borrower and the borrower’s other properties are required, resulting in a much quicker approval process. The private mortgage lender can make a decision within 24 hours of receiving information; institutional mortgage money must be approved by a loan committee that may only meet twice a month, and that may send the loan request back to the loan officer for more information, necessitating a further two week delay until the committee meets again.

Privacy Concerns

Borrowers may not want or be able to provide personal financial information or go through the hassles of the application process associated with obtaining an institutional mortgage loan. The borrower may be going through a divorce or business separation and may not want his wife, partner, government, lawyers, etc. to obtain his personal financial statement. Additionally the borrower may not have all financial information on all his real properties and businesses up to date or complete; he may have filed for an extension on his latest tax return; his accountant may be behind in preparing his financial statements. While all these would negate or at least delay his getting an institutional mortgage, it should have no effect on the borrower’s ability to obtain a private mortgage loan.

More Money

The real estate investor may be able to borrow more from the private or hard moneylender and therefore have less of his own capital invested in the property. Institutional mortgage lenders lend based on the lower of the cost of the property or appraised value of the property; private mortgage lenders lend based on the appraised value only. Hence the real estate investor utilizing a private or hard money loan is not penalized for purchasing the property at a significant discount to market value. Additionally, most private mortgage lenders do not have onerous seasoning requirements to make the loan.

Investment Parameters

The investment parameters for private mortgage loans differ considerably from those of institutional mortgage loans, as we partially discussed in the previous section. The most important parameter to be considered when evaluating a private mortgage loan request is loan to value. This is the ratio of the amount lent expressed as a percentage of the properties value. For example if an office building is worth $100,000 and we lend $65,000 total secured by this office building, then our loan to value ratio, or LTV is 65%.

Private mortgage lenders will typically lend up to 50% on raw land or undeveloped property; 65% on commercial income producing property such as office buildings, shopping centers, warehouses, etc. and 70% on residential income property such as a duplex or apartment complex. The key words here are up to; the maximum amount will be lent if all additional criteria are met and if the lender feels good about the loan, lower amounts can be lent if the loan or borrower is considered less than ideal. This is a gut decision made by the lender with an in depth understanding of the criteria being used and the experience of looking at many lending proposals.

The second parameter is the type of properties to lend on. This is often determined by the comfort the lender has in disposing of this type of property in case of default. All other things being equal, single use property which would take a year to sell is obviously less desirable than a multi tenant office building which would not only sell quickly at 65%-80% of market value, but which would be producing income with tenants paying rents while the property is up for sale.

The third investment parameter the private or hard moneylender is concerned with is the cash flow or income potential of the property being put up as security for the note. Although many private mortgage lenders are liberal in this area, the monthly interest payments to keep the note current must come from somewhere. If the property is rented out and is producing a cash flow after all expenses of an amount at least equal to the note payment, the monthly payments can be covered by the property income alone without the borrower having to come out of pocket. This adds a great degree of safety to the note. Cash flow from other income properties or other sources can be substituted for cash flow from the property being placed as collateral; however, the income to pay the mortgage payments must be available from some source.

The fourth major investment parameter the lender must consider is exit strategy. Very simply, this is how the borrower plans to repay the loan. Since most private mortgage loans are short term the private mortgage lender has a keen interest in finding out the borrower’s exit strategy and in analyzing whether this exit strategy is viable, and the risk of this particular exit strategy. The particular exit strategy must have a reasonable chance of success.

Typical exit strategies include property sale before the note is due, refinancing the property with a long term mortgage loan, packaging the property with other properties owned or to be acquired by the borrower and obtaining a blanket mortgage on all the properties, borrowing on equity in other property owned by the borrower and selling a partnership interest in the property to an equity investor. Each of these strategies has numerous variations. The lender must determine the viability of any particular exit strategy.

If You Need Fast Access To Capital for REI Then A HML May Be Your New Best Friend.

There are a lot of misconceptions regarding Hard Money Loans and Hard Money Lenders (HMLs). Most of the confusion surrounds the differences between conventional mortgages and HMLs. I wanted to take a moment and try to answer many of the general Frequently Asked Questions as well as to compare a HML to a Conventional non-owner occupied investor loan.

Frequently Asked HML Questions

How does the program work?
HMLs provide Real Estate Investors access to asset based capital. We can fund quickly, typically within 72 hours of receiving the final docs from the Title Company. Hard Money is available for adequately collateralized loans on single-family residential houses and other Real Property including commercial projects.

What is the interest rate?
The interest rate depends upon the Lender. The rate will range from 14% interest only to 18% interest only annual interest rate payable monthly in most cases.

What Loan-to-Value are MLS looking for?
Typically a loan does not exceed 70% of the after-repaired-value (ARV).

How long is the loan for?
HMLs typically write the notes from 6 months to 12 months depending on the Lender and your needs.

What are the costs?
Costs vary depending on which Lender you use. All loans will require at-least a Title Policy, Vacant Dwelling Insurance, Inspection, “As-Is” Appraisal & Flood Certificate. Most require origination points.

Can I get repair money?
Yes. HMLs can fund repairs. HMLs require a “Draw Request” form to be filled out to identify the completed repairs to the property, Copies of the invoices from the vendors. Then, we will pay you once the work is inspected-HMLs do not pay in advance for any work.

Does my credit matter?
Yes and no. For the most part, HMLs look at the value of the property after it is repaired, how much you are paying for it, and how much the repairs will cost to determine how much we will lend. In some cases, with your consent some HMLs may need to checkout your credit history.

How do you decide how much to loan?
Typical loans range from $25,000 to $1,000,000: All loans are considered on a case-by-case basis. Each HML has their own criteria.

Do HMLs need an appraisal?
Yes, HMLs require “as-is” and “as-repaired appraisals”.

Do HMLs require inspections?
Yes, HMLs require inspections including the interior before funding and before a repair draw to ensure the work is completed in a satisfactory manner.

Do I need to put any money down?
In most cases, Yes. Most HMLs want to ensure that you have enough resources to finish the repairs and cover the costs of the loan plus any surprises. Therefore most HMLs require that origination/discount points and other required items be paid at or before closing. We are confident that if you cannot afford to close you typically cannot afford to take out this type of loan.

How much will my payments be?
To figure your monthly payment simply, multiply the rate by the loan amount and divide that number by 12.

Will HMLs finance commercial properties?
Yes, many HMLs will on a case-by-case basis finance commercial properties and then only if the loan is secured by improved real property such as the building and land.

Will HMLs finance apartment buildings?
Yes, many HMLs finance apartment buildings however understand that it will take us longer to get our due diligence done.

Do HMLs allow interest to be deferred to the end of the loan?
Some HMLs do. Most however have interest payable monthly. Again, we are confident that if you cannot afford to make monthly interest payments you typically cannot afford to take out this type of loan.

How do HMLs compare to a traditional non-owner occupied investor loan?
You might be surprised how competitive HMLs really are. Take a look at this comparison;

Comparison Matrix
DHLC’s Hard Money Tradtional Lender/Mortg. Co.
Time to Close 1 – 2 weeks 4- 6 weeks
Monthly Payment ($100k loan) $1166.66 @ 14% I/O $1098.00 @ 7% + MI
Credit Qualifications None – 65% of ARV Yes – Varies
Cost to Obtain Loan 4% – 5% 3% – 6%(Incl. Orig. Fees & SRP)
Pre-Payment Yes – 3 mo. min Yes – Up to 2 years

Final Analysis

In many cases an HML can be obtained faster and easier then a conventional loan and while in almost all cases the amount you can borrow from a HML exceeds the amount you can qualify for from a convention lender the cost difference is minimal. HMLs are not for everyone and every HML has a different program and qualification process. However if you need fast access to capital for REI then a HML may be your new best friend.

Good luck and may all your investments be profitable!

There are two types of financing that you need to be concerned with – short term and long term.

Short Term Financing

When a good note is for sale, it will usually be gone in just a few days. In most areas, note buyers have cash and are ready to move. You will greatly improve your profits by being able to pay cash for notes with a 12 hour notice or less. First, we’ll look at some examples and then we will begin looking at ways to develop financing resources.

Example One

A short while ago a note seller called me about a note that they needed to sell quickly. The call came at about 8:00 on a Thursday night and the seller needed cash by 8:00 Monday morning. The first thought that came to my mind was that 8:00 would be too early in the day to record any documents at the county recorders office.

That meant that I would have to close on Friday. We negotiated the price over the phone and set an appointment for 8:30 the next morning (they mentioned an appointment with someone else at 9:00 – I wanted to be there first). You Snooze – You Lose. I left with a blank check in hand from an investor and did all I needed to close the note by about 3:00 that afternoon. By moving as quickly as I did, I bought a real good note at over a 24% yield before other note buyers had even returned the seller’s call.

Example Two

A seller called on Friday afternoon and needed a loan. We easily closed and gave him cash at the county recorders office on Monday.
Since we had cash and could close quickly ourselves, we received a 21% yield and ten points.

Example Three

An agent called on 8:30 on a Monday morning about a property that was scheduled to go to sale at 10:00 for a foreclosure of the FHA first loan. By 10:00 we had bought the second of $7600 for $2000 and the third loan of $3000 for $400 and reinstated the first loan.

Pre-Sold at a Profit

We had already pre-arranged with the tenant to buy the property. A couple days later we closed on the sale of the property on a wrap around loan (contract) to the tenant. Nothing down and an instant cash flow for 30 years.

Example Four

Because we could close in one day, we were able to buy a nice first trust deed of $42,000 that had been seasoned for two and a half years for just $19,000. The seller of the note was leaving town and sold for much less than two or three of our other competitors had offered, because we could close a few days sooner. It just took a few hours to close the note.

Ready Cash or Credit

Maybe this illustrates why you need to have either ready cash or ready credit to be able to buy notes with. Short term financing or super-quick long term financing is the key to tying up many good deals out in the marketplace.

Long Term Financing (Institutions)

There are two general categories of long term financing. Let’s look at institutional financing first. The first place people go to try and finance notes is to their local bank. Institutions will finance paper, but the smaller institutions will be your best bet. Finance companies, credit unions and thrift and loans are usually much more flexible than large banks. In dealing with institutions, there are two very important factors that can help you.

Personal Relationship

First, a personal relationship and track record with your banker can make all the difference in whether you get a loan. Work hard to develop good relationships with the institutions that you deal with.

Backup Packages

The second important factor is to have a good backup package containing all of the information an institution could ever want to know about your note. This could include: appraisals, pictures, title reports, credit reports (yourself and the payor), copies of the note and trust deed, copies of loan documents on any other loans, information about any other loans, payment record, amortization schedules, any information you have about the payor of the note and any other information that is pertinent. Remember, with a bank, you are “Paid by the Pound.”

What’s wrong with financing with financial institutions? It can be hard to find an institution that will finance you. They do not understand “paper” and the time value of money. If a banker has a financial calculator on his desk – it is a paper weight. You may have to train and educate the banker and then do it all over again as he is promoted or transferred. Their policies can change at a moments notice and they can be very strict on their lending policies. They may not lend on the length of term that you need. They can be very slow and fickle.

Long Term Financing (Private Investors)

I much prefer using private investors for my financing. Once they are familiar with paper, they can be easy to work with. I have the best success in cultivating investors from scratch. I show them how their cash flow can be increased through investment in paper and techniques like “Equity arbitrage” and the “Discount Refinance”.

I teach my investors about paper, familiarize them with the forms I use and prepare them to move quickly. I make sure that their funds are readily accessible to them (cash or immediately accessible credit) and that they realize how important timing can be in buying notes. We look at sample notes of past transactions and discuss the steps in closing the note. Many of these investors come from calls I receive because of my ad in the classifieds for buying paper. They read the ad and then call to ask if I also sell notes.

Another way to find investors is to advertise to sell a particular note that you have. Anyone that is receiving less than a 12-18% rate of return is a good potential investor. I stress the safety of paper and the fact that it is backed up by real estate. Once they see the cash flow, they start getting excited. I determine the rate to give them based on what we negotiate.

I learned along time ago that in negotiations, “he who names a number first loses”. I try to determine early in the negotiations what the comfort zone of the investor is, because I have found that it can be devastating to offer them too high of a rate of return if they don”t believe it is possible. Many investors will invest with you at 14% when 20% would scare them and make them feel it is risky – even though it is the same identical investment.

Risk Versus Rate of Return

Even though I would like to give them a high rate of return, some investors would feel there is risk. Somewhere along the line they bought the fallacy that a high rate of return means a high risk. Paper is a perfect violation of that rule of thumb.

I secure the money borrowed from the investor by the note that is being purchased. I buy the note at yields of 14% and higher and borrow the money at from 10 to 14%. The terms are structured similar to the note that is purchased.

Sources of Short Term Financing

One of the best sources of short term financing is to use credit cards. It isn’t too hard to build up credit card credit. The short term financing that you need should be about 10 to 25 thousand dollars. There is nothing at all wrong about having credit cards or easily available credit. It can be one of the best assets that you can have. The only problem comes when someone uses this credit improperly. Credit cards can be an expensive form of financing if used for a long term.

If used for a short time period (less than 30 days), many cards do not charge any interest at all. If interest is charged, it amounts to very little when compared to the opportunity cost of missing out on a good note. Refinance with lower interest long term financing as soon as possible.

H.E.L.O.C. Loans

You may find the best of both worlds to be the Home Equity Lines Of Credit that is secured by your home. The amounts available can be in the tens of thousands and the rates can be very reasonable. These lines of credit usually come with a checkbook giving you the ability to fund immediately.

Speedy Due-Diligence

A nice thing about using short term financing is that you can purchase the note and then gather the information and documentation needed to put together a real nice financing package to obtain long term financing. Another source of short term credit is to line up an unsecured line of credit with your banker that can be accessed easily and quickly.

Investors and private money brokers can be cultivated to act quickly and loan money for interim financing between when you buy the note and refinance with a long term loan. They may want high rates, but again, it can be well worth it if it helps you get a good note. Avoid points if at all possible on any short term financing. There can also be a mixture of the two forms of financing in cases where an institution may loan against the note, but not all that you need to buy it.

An example is an institution in our area that at one point had a policy of loaning only 75% of what they would buy the note for. This may be all I need if I am getting a better yield than they are willing to pay. If getting the same yield, I can borrow the 75% from them and then worry about getting the extra 25% from somewhere else.

This should give you some ideas about financing notes. I have found it possible to finance every note that I buy at 100% or more of what I have needed to pay and it can happen just as easily in your area or your case.