What is a Hard Money Loan?
Hard money loans are a specialized type of real estate backed loans. Hard money lenders or private lenders provide short-term loans based on the value of real estate that has been collateralized for the loan.
Hard money loans typically have a much higher interest rate than bank loans because they fund deals that do not conform to bank standards and have higher risks. Hard money loans are more expensive than traditional loans because they are not based upon traditional credit guidelines. Hard money lenders may not require the income verification, credit score, etc. that typical lenders do, but their interest rate and points are higher.
"Points" on a hard money loan vary widely, some lenders may charge 1 to 3 points, while other lenders may charge up to 7 or 8 points. Some lenders base the points charged on the rehab experience of the borrower with regular clients getting reduced points the more business they do.
New rehabbers should not do more than 1 project at a time, especially in this economy. You don't want to be stuck with a couple of houses when you do not have the finances to maintain them until they are sold. Also, as a new rehabber, you should get yourself registered (qualified) with a Hard Money Lender first so you can act fast when you find a house to rehab. You will able to get a "proof of funds" letter quickly from your Hard Money Lender to be qualified as a cash buyer. It is important to be a cash buyer since the sellers of foreclosed or distressed properties want fast deals. In fact, most ads or MLS listings require a pre-approved buyer and request the proof of funds letter to be submitted with the purchase contract. With most Hard Money Lenders, it is not difficult to get qualified. Usually it takes a simple application, a bit of information about your experience or lack thereof and some personal information.
The advantages of using Hard Money Loans are:
Pricing your home is one of the most important aspects of your rehabbing. You should determine a selling price when you purchase the property. However, sometimes things change and the original price you calculated to sell it is not longer an option. Always remember that you make a profit when you BUY the property, not when you SELL it!! This means that if you do not make a wise and well thought out purchase, there is no way you are going to make money. It just doesn't happen because you want it to happen. This is a process that needs to be calculated to the end and that includes the SALE of the property after it has been rehabbed.
Pricing: Realize that because of the economy and the current housing market conditions, there are many properties on the market. Some are in great shape, some need a little work and some need a lot of work. Also there are a lot of pre-foreclosures, foreclosures and short sales. Ask yourself some questions:
1. Are there many distressed properties in the area?
2. Are there a lot of vacant lots?
3. Do the neighbors keep up their properties?
4. Are there schools nearby?
5. Are shopping areas convenient? Within walking distance?
6. Are there streetlights and sidewalks?
7. What about transportation? Bus lines? Train Lines?
8. Do comps in the neighborhood. Have your Realtor pull rehabbed properties in the same area that have recently sold (within 6 months), or do drive-bys yourself and look up the comparables with www.zillow.com or www.realtytrac.com. These sites will give you approximate values and can help you make the decision whether this is the right house to buy for rehab. Don't fudge the numbers. Make sure you comps are similar size, number of bedrooms and baths, design, frame or brick, etc. If one or more of your "test items" does not work out, then move on to another property.
All of this must be considered when making a purchase for rehab.
The actual funding of the deal, the paperwork and how it works will be discussed in my next article.
Hard money loans are a specialized type of real estate backed loans. Hard money lenders or private lenders provide short-term loans based on the value of real estate that has been collateralized for the loan.
Hard money loans typically have a much higher interest rate than bank loans because they fund deals that do not conform to bank standards and have higher risks. Hard money loans are more expensive than traditional loans because they are not based upon traditional credit guidelines. Hard money lenders may not require the income verification, credit score, etc. that typical lenders do, but their interest rate and points are higher.
"Points" on a hard money loan vary widely, some lenders may charge 1 to 3 points, while other lenders may charge up to 7 or 8 points. Some lenders base the points charged on the rehab experience of the borrower with regular clients getting reduced points the more business they do.
New rehabbers should not do more than 1 project at a time, especially in this economy. You don't want to be stuck with a couple of houses when you do not have the finances to maintain them until they are sold. Also, as a new rehabber, you should get yourself registered (qualified) with a Hard Money Lender first so you can act fast when you find a house to rehab. You will able to get a "proof of funds" letter quickly from your Hard Money Lender to be qualified as a cash buyer. It is important to be a cash buyer since the sellers of foreclosed or distressed properties want fast deals. In fact, most ads or MLS listings require a pre-approved buyer and request the proof of funds letter to be submitted with the purchase contract. With most Hard Money Lenders, it is not difficult to get qualified. Usually it takes a simple application, a bit of information about your experience or lack thereof and some personal information.
The advantages of using Hard Money Loans are:
- No Credit history, tax returns, W-2's or job history
- You can make All Cash Offers
- The property value is used to determine the loan, not your income.
- Close in a very short time frame.
- Purchase the property and have the funds available to rehab it in one loan.
- The Hard Money Lender understands all aspects of rehabbing and can, if necessary, be flexible on their programs.
Pricing your home is one of the most important aspects of your rehabbing. You should determine a selling price when you purchase the property. However, sometimes things change and the original price you calculated to sell it is not longer an option. Always remember that you make a profit when you BUY the property, not when you SELL it!! This means that if you do not make a wise and well thought out purchase, there is no way you are going to make money. It just doesn't happen because you want it to happen. This is a process that needs to be calculated to the end and that includes the SALE of the property after it has been rehabbed.
Pricing: Realize that because of the economy and the current housing market conditions, there are many properties on the market. Some are in great shape, some need a little work and some need a lot of work. Also there are a lot of pre-foreclosures, foreclosures and short sales. Ask yourself some questions:
- Would I buy this rehabbed home before buying a pre-foreclosure, foreclosure or short sale (distressed properties)?
- How is the new buyer's appraiser going to evaluate the home; equal to the distressed properties in the neighborhood or better? Sometimes appraisers don't look at the upgrades you may have put in to your project. A "budget" buyer might buy the short sale or foreclosed house that needs a little work for less money than what you are asking.
1. Are there many distressed properties in the area?
2. Are there a lot of vacant lots?
3. Do the neighbors keep up their properties?
4. Are there schools nearby?
5. Are shopping areas convenient? Within walking distance?
6. Are there streetlights and sidewalks?
7. What about transportation? Bus lines? Train Lines?
8. Do comps in the neighborhood. Have your Realtor pull rehabbed properties in the same area that have recently sold (within 6 months), or do drive-bys yourself and look up the comparables with www.zillow.com or www.realtytrac.com. These sites will give you approximate values and can help you make the decision whether this is the right house to buy for rehab. Don't fudge the numbers. Make sure you comps are similar size, number of bedrooms and baths, design, frame or brick, etc. If one or more of your "test items" does not work out, then move on to another property.
All of this must be considered when making a purchase for rehab.
The actual funding of the deal, the paperwork and how it works will be discussed in my next article.
I have ten years experience in Real Estate Investing. As a Real Estate Broker with my own company, I have personally rehabbed properties and wholesaled single family and two-flats in the Chicago area.
I am currently writing E-Books on Real Estate as an Investment, Hard Money Lending and Rehabbing for Profit that will be available on my website at http://www.RealEstateRehabProfits.com. Hard Money Lending criteria is available on the website http://www.zdeinvestments.com
I will also continue contributing shorter articles on many subjects pertaining to Real Estate.
I am currently writing E-Books on Real Estate as an Investment, Hard Money Lending and Rehabbing for Profit that will be available on my website at http://www.RealEstateRehabProfits.com. Hard Money Lending criteria is available on the website http://www.zdeinvestments.com
I will also continue contributing shorter articles on many subjects pertaining to Real Estate.
Article Source: http://EzineArticles.com/?expert=Rebecca_A_Miller
1 comment:
You learn something new everyday... I didn't know these type of loans even existed. It's great to know because, it can be use for emergency repairs and other occasions. Great advice.
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