I recently attended a real estate investment seminar in Las Vegas. Between speeches by different "gurus" I would mingle with other investors and explain that I owned a hard money brokerage firm. Even though it has been around for almost a hundred years now, I was amazed how hard money lenders still seem to be mysterious to many investors. They either did not understand how the hard money lending industry worked or had heard that it was something they should avoid like the plague.
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To put it simply, hard money loans are short term loans that are used for various real estate projects. The most common projects are house flipping, but they are also used in commercial construction and land development. Essentially, a hard money loan is often the best choice for oney that is needed on a short term basis.
Unlike conventional financing, a hard money loan also known as a private loan originates from a private individual or institution unlike a bank. The loans are generally short term between 6 and 12 months and have a high, interest only payment generally between 10% and 14%
Another major difference between a hard money loan and a conventional loan is that a hard money loan is not based on a person's credit but instead on the value of the project after its completion. A good example is if John has a house that he wishes to rehab and sell for $100,000.00 a hard money lender will lend up to $65,000.00. This is what is known as Loan to Value or LTV. Most hard money lenders lend anywhere from 55% to 70% LTV depending upon what type of project the borrower has.
Now you are probably asking yourself what the catch is, how do these lenders make there money? Hard money lenders make there money 3 different ways. The first way they make there money is the closing costs. These are anywhere from 1 to 4 percentage points of the overall loan. These points are paid when the loan is completely paid off in full. The second way they make there money is the interest only monthly payments on the loan which is anywhere from 10% to 14%. The third way they make there money is if the borrower happens to default on the loan. Being as the loan is not based on the person's credit, hard money loans are secured by the property itself. If a borrower defaults, the hard money lender now has a property or piece of land for 65% of what it is worth. However, it should be stated that this rarely occurs as most hard money lenders are not in the business of foreclosing on properties.
So should a borrower use a hard money lender? The simple answer is if a borrower has a real estate project that needs short term financing that a conventional bank will not lend on, yes.
In today's real estate market, many homeowners, as well as investors, are going down roads and using various tools that they would not have considered previously. When things are going well and the real estate market is hot, most people would believe that the good times are here to stay. Unfortunately, good times were at the peak of the roller coaster, and the market came down twice as fast as it went up. In many areas, prices fell back to where they were eight years ago, before the real estate frenzy started. When times are going well, we all know how to act. "Yippee, hurray, woopdedo, woopdedo!" When times get tough, that is when the real investor shows his true moxie.
There comes a point, when the market is crashing, when you have to ask yourself: "Is this house worth keeping?" For an investor, it is usually a just financial decision. Some people do not want to sell because they will lose too much money. The sad part is that they have already lost their equity. Why ride a horse with a bad leg? Something that has become common in this market is the short sale. A short sale is when a property has fallen in value below its mortgage amount, and the bank is willing to accept less than the amount owed. In the past, most banks would not have agreed to this. Today, there are too many houses that are being foreclosed on, and to the banks, this is the lesser of two evils.
Here is my experience, with an investor I know of, with two different short sales. House A was purchased at the peak of the market for $230,000. The loan was with a bank that he has done much business with. The investor had an eight cash for house las vegas year relationship with this bank. The original loan officer was a terrific guy, who was great to deal with. Unfortunately, he lost a battle to cancer. Afterwards, the investor was switched around to a few different people. He ended up with a gentleman we will call Dan. (That is actually his real name). He made Dan aware of his history with the bank, and what his intentions were. The area in question has been hit hard by the real estate crash. The property in question was on the market for sale. He was advised by Dan to send in an offer when he received one.
The property was originally listed for $80,000 with a real estate agent. The loan amount was $130,000. After not getting any showings, they gradually reduced the price. When it was listed for $60,000, they received an offer for $54,000. This was an all cash, 30 day close offer. He sent all of the information in to Dan, and was told to counter the offer at $67,000. He did, and the buyer came up to $58,500. All cash, 30 day close. In this market, that is very good. They had an inspection done on the house, and it was confirmed that it needed repair work; it has an original roof, and an original air conditioner. Dan turned down this offer, and said to sell it for no less than $64,000. The buyers of course walked away.
Eventually they had another offer, this time for $50,000. This is still a good offer in this market. This was turned down also. After the realtor also spoke with Dan a number of times, he said he would accept an offer of $58,000. After another month or so, they got an offer for $56,000, all cash, 30 day close. Dan said to counter at $57,000, and the buyer accepted. After he sent all of the paperwork to Dan and the bank to review, they took a while to come back with an answer. In the meantime, the Federal Government came in and shut down the bank, and another bank took over. There was a big article on the front page local newspaper about unethical practices. After this happened, it took at least another week before Dan could get back to our investor with an answer. When he got back to him, he was told that in order for the bank to accept a short sale, he would have to sign an agreement that he would pay back the balance of the loan. It is obvious that Dan and the bank do not understand the meaning of a short sale. Of course, the investor told Dan that he could not accept that. The property is off the market, and the investor continues to collect rent.
This investor had another property that was also on the market at the same time. There was an offer on this property and he submitted all of the information to the bank to consider a short sale. It took about six months before the bank came back with an answer. One week he received a notice that a foreclosure was about a month away. The next week he received a letter from the bank that they would accept a short sale. They closed two weeks later. Each bank is different. In this market, it is in the banks best interest to accept a short sale. When a bank takes back a property in foreclosure, they receive much less for it. In our first situation with Dan, it is easy to see how the banks have gotten themselves in so much hot water with poor business decisions. In our second scenario, everyone came out a winner, especially the buyer. Remember to always be an informed investor.
