How does a hard money loan work?
There are tons of loans available to real estate investors. One type of loan commonly used by investors is the hard money loan. These loans allow investors to buy and repair investment properties. If used correctly, it can definitely put money in your pocket right away. But keep in mind that there are some pitfalls you will need to avoid to be successful. Here’s how a Hard Money works and what to look for.
1. Scope of work: For these specific types of loans, lenders will require the investor to provide a scope worksheet. All repairs you plan to do should be noted on this sheet. The scope of the worksheet is what the Hard Money lender will use as a guide to pay for the project. If repairs are made that are not on the worksheet, you may have trouble getting reimbursed by the Hard Money lender. The lender will want to see everything in writing to make sure everyone is on the same page. Lenders will normally allow investors to change the scope of work mid-project if possible and necessary.
2. Requirements – Most Hard Money lenders now want a 20% investor discount on all projects. The lender will also want to see reserve money in a bank. The investor’s monthly income will play an important role with the lender in approving the loan. Credit score is a factor, but they don’t require a stellar score to be approved for a loan. The last Hard Money lender I used didn’t even get my FICA score, they just wanted to see a copy of my credit report, which I was able to request for free. There will be requirements for the value of the loan, but each lender will have their own set of guidelines.
3. Overestimating Repairs – Repairs to an investment property are always just an estimate. When a property is rehabbed, nothing goes according to plan. Overestimate the repair that must be done to cover yourself if repairs are added later in the rehab. If you did a good job with the initial inspection and no additional repairs were necessary, you can return the money or keep it. If you decide to keep it, do not spend the additional funds. Save the extra money as an additional reserve.
4. Process- The process of receiving money for repairs is called a lottery. After your contractor completes a percentage of the work, you will call your Hard Money lender and tell them that you are ready for an inspection. The lender will send an inspector to verify that the work has been done and completed within code guidelines. Once the inspector gives the lender approval, the lender will release funds that equal the amount set for the cost of the job. For example, if you listed carpet repair $ 1,500, paint $ 1,200, and new lamps $ 100; When the inspector checks all the items – The lender will give you a check for $ 2,800. Now you can understand why it is important to have all the repairs and costs listed on the worksheet. If the repairs are not listed, you will not be paid. Typically, the lender will give you 3-7 inspection dates depending on how large the project is. Unless you can convince the contractor to go to work without putting in money, you will have to do it to get started. Expect to receive a refund from the Hard Money Lender through your money order checks.
5. Refinancing – This is the most important part of rehabbing a property with a hard money lender. Hard money loans are short-term loans with high interest rates. These interest-only loans will have an interest rate of around 15%. That may sound high, but these types of lenders understand how important it is to make money and get out. We need these companies to rehabilitate properties if we cannot finance our own projects. Hard Money lenders realize the risk they are taking, so lenders ask “WIIFM” (What’s in it for me?). They made up for it with a high interest rate for the risk they take. Hard Money lenders expect you to sell the property quickly for a profit or refinance it into a long-term loan and rent it out to a tenant. Whatever your exit strategy, make sure you do it fast. Hard money loans typically mature in full 6 to 12 months after they originate.
Hard money lenders have allowed many investors to make money on real estate. These types of lenders are more flexible compared to traditional ones. They allow investors to make things happen when no other lender wants to take a chance. His guidelines are losers and allow an investor to spread his wings. These types of loans are expensive, but can allow more deals to be made due to the amount of money they have access to.