EVERYTHING YOU WANTED TO KNOW ABOUT HARD MONEY OR PRIVATE MONEY LOANS AND RESOURCES BUT WERE AFRAID TO ASK.

Hard money is not a scam it is a useful tool when used for its purpose.

Hard money is usually misunderstood. Many industry professionals know a small amount about it, and fallacies and misconceptions have a tendency to control the collective wisdom.

What is Hard Money used for?

Everything you wanted to know.

Hard money is in general used as a bridge: A way to get from point A to point B. It is in general a short to medium term solution (1-6 years), and there is almost always an exit strategy going in. It is used in support of all types of real estate secured financing: Commercial retail, restaurants, hotels/motels, marinas, elder care facilities, industrial, agricultural, raw land, land development, construction, rehab, multi-family, single family homes, manufactured homes, and floating homes.

The averages of interest rates are?

Hard money rates in general range from 10 to 15%. The rate is determined by looking at a combination of factors: (a) LTV ratio, (b) strength of borrower, (c) condition/desirability of property, (d) actual cash-in or real equity contributed by borrower.

What fees are usually involved?

We generally charge a loan fee anywhere from 5-11% of the gross amount of the loan. Depending on the type of loans and the risk involved. We also charge a doc prep fee, a property inspection fee, and sometimes a collection account setup fee which is based on the size of the loan. These fees are usually reffered to as due dilligence fees, or research funds. There are no hidden junk fees and if for some reason the loans does not close the funds that are not used are refunded.

Can the fees be paid from the proceeds of the loan?

Yes, if there is enough equity in the project and the investor decides that he is comfortable with it. This is not frequently the case, most hard money lenders what you to have some skin in the game or money in the deal yourself. They do not want the property they want the fees and the interest that is coming from you borrowing it. To make it simple, they want you to have risk in the deal also. the reasons for this is because it means you wont be able to skip out on them leaving them with real estate they do not want or are unable to get rid of on the market.

Is there a pre-payment penalty?

We generally don’t have a pre-payment fee but occasionally we have a 3-6 month minimum interest clause minimum interest clause for our loans. For instance, it means that if a borrower repays a loan in 3 months or more, there is no penalty. If the borrower repays the loan, for example in 2 months, then the borrower will have to pay an extra month’s interest out of escrow at closing. This is a general pre-pay penalty and is usually only on loans where they client has little skin in the game.

Why would anyone pay those kinds of rates and fees for a loan?

There are many reasons why a borrower would choose to use Hard money over a cheaper institutional option. For example, professional real estate investors like to use Hard money when buying because they are able to make offers which are not constrained by long timelines and numerous rigid conditions. Often times speed is a very significant factor in completing a profitable transaction and in those cases it often makes sense to pay for a short-term Hard money option rather than loose the deal. Frequently the condition of a property won’t allow for the initial financing with conventional money, and in those cases Hard money may be used. Often the type of property is a factor: banks don’t like lending on raw land and lots, but Hard money lenders are more inclined to do so. Cash leverage is another factor. For example, loans based on the true value of a property, not the purchase price, so sometimes we lend 100% of the total acquisition cost for a property. The structure of the deal may be a factor. Most Hard money lenders allow the buyer to establish their equity through the mechanism of a seller carry back; banks won’t do this. Another and very frequent use due to the economy’s state and the fact that banks are not lending over say 1 million dollars at the moment means if you want to buy a home that is over that amount you will have to use hard money. At the moment there is no alternative or you simply cannot buy the property. Even the really well off borrowers at the moment cannot get the homes they want like they usually buy through their banks. The list goes on and on.

What is the most common use for Hard money?

Our most common loans are probably super jumbo, construction, rehab, and land development loans.
How fast can Hard money loans close?

We have been known to close loans in a matter of a week, but more typically, you should figure on 2-3 weeks. (Keep in mind that it is only possible for us to move quickly if the borrower, broker and other third parties are moving quickly as well.)

Is an appraisal required?

Some Hard money lenders require them. We usually order one of our own. Evidence of value is a critical part of the Hard money loan process. However, it is our opinion that a good set of comps is just as effective in establishing value as a good appraisal. Many of our borrowers are professional investors, and we feel that they are qualified to perform the value analysis. This allows us to streamline the process. However, it is important to note that putting together a god set of comps is hard work. See this article on our website for a detailed description of how to prepare a proper value analysis.

As a mainstream mortgage broker, I don’t see much of this type of thing. Why should I be interested in Hard money?

To be perfectly frank, it is my belief that mainstream mortgage brokers are being squeezed out of the industry. Lenders are ramping up their operations to better provide online loan sourcing directly to borrowers. We saw a similar thing in the travel industry over the past years. The travel agents that have survived, and even thrived, are the ones who effectively established niches within the industry. It is my belief that the same will be true for mortgage brokers. Plain vanilla loans can be easily processed in an assembly line fashion which easily translates to the world of the novice and a web browser. Niche lending, on the other hand, tends to be a hand-crafting of sorts, and cannot be easily automated. Look at Hard money. There are no absolute rules. Many factors must be considered in making a decision and frequently those factors are intangible. Ultimately a high degree of thought work and common sense is involved. Hard money will always be a people process. So if you tell me, “I am not interested in Hard money because I don’t do unusual loans,” I say to you, “You might want to reconsider.”

As a mortgage broker bringing you this transaction, how do I get paid?

It is simple. You bring us a borrower. We price the loan to you. (Think of yourself as a wholesale buyer.) You price the loan to your client, adding your fees as appropriate. You stay involved in the loan (or not) as you choose, and prior to closing, you submit a fee demand to escrow and receive a check directly from the title company, or have a third party fee agreement filled out and signed by you client.

Why do they call it “hard money”?

It is difficult to find an answer to this question. I’ve heard plenty of speculation. Some people say that it’s because the money is used for “hard to do” loans. Others say it is because the loans are “hard to get” or “hard to pay.” It is my belief that it is called hard money because traditionally it has been “real money” in the sense that it is not borrowed. Institutions loan borrowed money, and in this sense they loan “soft money.” However, I must point out that things have changed a bit over the years, and these days a good deal of hard money is in fact borrowed. (I would guess as much as 50%.)

How do I go about doing a Hard money loan with you?

There are basically four steps.

1- First, run the concept by us. You may call and discuss the loan with us, or you may e-mail a summary, or you may use our online loan submission engine, which will walk you through the process. If we like the project concept and feel that the numbers are acceptable, we proceed to the next step.

2- We review a complete loan packet. We ask that this be sent email unless we need original signatures.
If all this checks out, we submit to you a terms sheet. The term sheet will have the rates and all the details we are offering and an approval. We then ask for the due diligence fees, this is to research the package you submitted to us and the property. If it is accurate and there is no fraud involved we will then send the loans to our funding department and set up closing.

Is the due diligence fee refundable?

If we close the loan through escrow, the deposit is applied as a credit to the loan fees. If we don’t close the loan because (a) the borrower does not or cannot perform or (b) facts or parameters of the loan are significantly different than as represented, we keep the deposit to reimburse us for our costs. Otherwise, if property fails to perform for any reason, we return the unused part of the deposit to the borrower.

How does the construction money get disbursed?

From time to time, as a borrower completes the construction of a project, the borrower will submit a draw request to us. We will review this request and, upon approval, release funds either directly to the subs/suppliers (if requested to do so) or to the borrower (if the borrower has already paid the subs/suppliers). We are responsible for ensuring that (a) the work is completed to an appropriate quality standard (this may require an on-site inspection which will incur a fee specified in the Loan Agreement), (b) the project is on-budget (or if not on-budget, appropriate adjustments are made), and (c) that all subs and suppliers get paid for their work on the project.

What needs to be included in a Hard money loan package?

When you submit the project to us we will tell you what we will require at that time for starters send us your executive summery outlining the deal.