There are many ways to successfully invest in real estate. We don’t hear so much about hard money lending these days, but it still has a valuable place in the investment world. Hard money lenders typically don’t assess real estate the same way most investors and other real estate professionals do. Hard money loans can be easier to obtain, but they can be expensive. Despite their cost, they are an essential tool for investors. Knowing when to use hard money and how to get it is essential.
As an investor, you need to know your local market inside and out. You should instinctively get a good idea of the property’s value after a brief inspection. What is different for hard money lenders is that they often lend money outside of their local market. It can be in a remote city or across the country. Hard money lenders cannot physically inspect the property themselves and do not have a solid understanding of local property values.
Every private contract is written for the mutual benefit of the investor and the lender, but there are general rules that govern the hard money market. Hard money lenders do not use the standard underwriting process used by banks. Banks focus on the borrower’s credit history and income. A bank loan is generally 90% or more of the value of the home.
Hard money lenders focus on the value of the property rather than the creditworthiness of the borrower. Sure, they’ll look at a professional appraisal, but it’s not the only appraisal tool they rely on. Often times, they want at least two and maybe three assessment models to make an informed decision. Hard money lenders will review tax appraisal records, but again, this is not a reliable way to appraise real estate. Tax assessment districts calculate the values on an annual basis at best and only a lot every two years. In addition, the tax authorities only assess properties at the edge of the street. They do not have access to the interior of the house.
Another tool that hard money lenders use to value property is the Broker’s Price Opinion (BPO). A BPO is an appraisal by a broker of the value of the property. However, hard money lenders are also skeptical of these valuations, as brokers tend to overvalue properties in the hopes of a higher listing fee and an optimistic view of the local real estate market.
The value a lender places on a property has nothing to do with the purchase price you negotiated. It will be based on what the market values the property at.
Ultimately, hard money lenders take all the information available to make an informed decision. They ask themselves questions like, “If the market hits a bottom, will I be able to get back the money loaned for the property?” Will I take advantage of this property even if I have to regain control of it in the event of a default?
To fully protect themselves, hard money lenders typically only lend 50-70% of the property’s value. As an investor, you will either need to negotiate a purchase price within this range or have additional financing available. Also, keep in mind that a hard money lender knows the repair and rollover business as well as any investor. They will want to know your exact plan for the property and will need to approve it along with the value of the property.
Most hard money lenders make short term loans on average between six months and two years. Generally, the biggest benefit of hard money is a quick close. Since there is no credit check, closing can take place a few days after an application is approved. If you have established a relationship with a hard money lender, the loans can be funded within hours. An investor interested in hard money should know what documents will be needed to approve the application.
If your ducks aren’t all lined up, funding may take a few weeks, but as little as three to five days are possible. If you have a trusting relationship with a hard money lender, you may be able to have funds within 24-72 hours.
Hard money is not for everyone (or even most people). The only reason to take out this type of loan is a great investment that requires a quick response. It can cost you 10% of the loan amount for interest and loan fees. But when you can earn 30% on a deal in a matter of weeks or months, paying more for quick finance is probably worth it. When a good investment won’t wait, a hard money loan can always be the best answer.
What else do you think investors need to know about hard money loans? Share your ideas and experiences by leaving a comment.
Additionally, our weekly Ask Brian column welcomes questions from readers of all levels of experience with residential real estate. Please send your questions, inquiries, or story ideas to [email protected]
Author Biography: Brian Kline has been investing in real estate for over 35 years and has been writing about real estate investing for 12 years. He also draws on more than 30 years of business experience, including 12 years as a director at Boeing Aircraft Company. Brian currently lives in Lake Cushman, Washington. A vacation destination, close to a national and the Pacific Ocean.