Hard Money Loans (a primer)

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Hard Money loans are expensive and tricky, but most of all a very necessary evil. If you decide to get one please take careful note of the following:

Hard Money loans are expensive and tricky, but most of all a very necessary evil. If you decide to get one please take careful note of the following:

Interest points
Entry points or just Points
Exit points
Fees
Penalties and/or Pre payment penalties

If you want quick money it is definitely the way to go. But you need to make sure your deal can afford such a cost. If you factor in a cost of 25% of the amount loaned, you will be close to what it actually costs to do a hard money loan. Other terms will be mezzanine, bridge, quick, or fast, but they all fall under the category of "hard money".
You will also want to check your credit as the minimum I have seen needed is 620, some will go lower, but most will want a 680 middle score. Obviously the higher your credit the lower the costs. And do not think that it is a no money down loan, as most will want to see some of your(or borrowed) money into the deal. Ask them up front if the money put in needs to be sourced (in your posession) or seasoned (has been in your posession for 60 days). If it doesnt then you can borrow the down payment. If it does check your seasoning requirements. and make sure you qualify before moving forward.
This type of loan should be considered only after all of your private money sources and conventional means have been extinguished. Its the same as a payday loan, only get it in emergency situations.
If you have a non conforming house, a property that has too many businesses on it, or a business that has potential but not good cash flow as is, then a hard money loan is for you. But again make sure that the deal is so good that you are buying it for at least 75% or less of its potential worth, as it will cost you enormaous fees to get it. Factor in the 25%, take a deep breath and lunge into it if that is what it will take to close the deal. There are over 4000 loan programs available as of the writing of this article. There is no way for you to check each one to see if your deal and you qualify. So Hard money loans are made available for this reason. All deals qualify for Hard money as long as the property is worth a certain percentage of the loan.

.......Kyle

Comments(16)

  • GFous4th November, 2003

    Kyle-



    I appreciate your article but I have to say that I think you miss the boat with your title. I do not think this is a "primer" on what a hard money loan is. ( Because I still do not understand the term as you use it (-smile



    I say this because even though I am an experienced creative investor - I have not heard the term used before in the connotation it is used on this web site.



    I have read definitions of "hard money" in posts on the site, and I have come to the conclusion that it is a term used by a certain type of real estate investor that is looking to borrow money from a lender and willing to pay an high rate of retun for it for a short time..



    I know mezzanine financing and "seed" financing. These are terms more in general use and I think this is what you are talking about when you use the term "hard money" This is the money you need to "shape up the deal" in order to get your long term financing.



    Is this what you mean by "hard" money?



    To me a hard money lender is a lender that loans on the merit of the deal, not on a borrower.





    I would appreciate your comments.



    Gregg

    • KyleGatton5th November, 2003 Reply

      I used the term "primer" to denote that it covered the basic elements of the subject. Also as of the past 5 years all of the lenders are now wrapping all of the different types of Mezzanine and seed types of loans into the category of "hard" money. You will see the trend soon if you havent already in your area of the country. The midwestern states have been the last to change the category so far, but they too will soon change with the industry.

  • beameraz4th November, 2003

    I definately agree with 99% of what Kyle says in his article. Hard Money must be realistically factored into the deal. However, I would add that SOME Hard Money lenders will lend based on the appraisal with no money down and no credit check.



    My 2 cents... If I'm going the Hard Money route and paying high interest rates, I don't want an inquiry or any sign whatsoever on my credit report. Because if I decide to refi after I'm done rehabbing or whatever, I'm going to get an inquiry from the conventional lender. Ever seen what 2 or 3 inquiries back to back does to your credit score. According to CreditExpert's credit score simulator it can drop 30 points or more!



    Finding a GOOD Hard Money lender is NOT easy. Believe me...the first 2 I looked into were like night and day compared to the one I have now.

    • KellyfromSac5th November, 2003 Reply

      Beameraz,

      May I ask who you use now? The only hml that i have found want min score and down pmt. My question then would be," why use a hml if i have 20% of fmv and score descent enough for conventional financing?" There has got to be hml out there that are willing to look at the deal alone with no down. Please if anyone can advise, I would appreciate it.

  • Lufos4th November, 2003

    My first civilian job after a life of idle luxury in the Air Force was with a Mortgage Co. on Wilshire Blvd in Beverly Hills way back in 1954. They were a second mortgage house and their theory of life was Take Every Thing. I sat in front and took applications and in a few weeks was closing, appraising and in general messing up. One thing I learned, The Care and Feeding of Private (Hard, oh my god Hard) Lenders. When I left this Temple of Usury. The first thing I did was go down to the Hall of Records and put a Tag Bite on every second or third trust deed that recorded during the next 60 days. A nice old lady given to strong drink sat at a portable typewriter and listed them all for me. Name, Address and amount of loan and weather or not the loan was a second or a first. Now there was a current up to date list of every Private Lender in Southern California. So I called them all from my new office next door to where they killed chickens and I was in business.



    The Formulae in those days was interest at 10% and a standard Mortgage Brokers Fee of 10%. As I got to know on a lst name basis all these lenders I could fudge the edge. Interest only, No prepay, I could cut interest rates and cover from my commission when I was doing a good deed for a future position on title or refinance of lst or whatever.



    As time went on and I became known. Groups of Syndicated Investors would come to me to see if they could buy paper through me. I started to play the games. I would give a recourse on paper in exchange for being named Trustee (he that forecloses on default)

    I could then make a 6% interest loan 2nd TD make up the interest by paying an additional 4% myself and if the loan went sour I would then foreclose it and pay off the investor at end of sale. Sometimes I just refiled a new second trust deed with another investor. Nobody cared anymore because we were giving recourse and picking up all the paper if it went bad. And it did, so more and more property came into our possession and the beat went on.



    It was at this time that the first foreign syndicates came into being. First one was from Israel and because I had been there in the begining of the creation of the state of Israel I got the first groups who came to lend money at and around 8 to 10%. The next one came from the Lebanon and so it went. This was the establishment of a hard money source that could be used for Bridges whatever. By controling through "Full Recourse" you could control interest, time of committment etc.



    Now days you have sources. Like The Joiner Group or Budget. who say they will make a loan to anybody that can breath and sign their name. The costs are going up and of course are unwarranted. For their money borrowed to lend comes really cheap from Banks and other Organizations.



    My suggestion on todays market is to find private persons who need a high interest return which is not available in normal paper. If you can qualify as a Trustee and absorb those duties, plus are strong enough to guarantee payment to lender on any default, you should be in a position to make some interesting plays as the market changes in front of us.



    Perhaps the time has come to form an interchange among the members of TCI with the leaders of the Site monitering and in direction. I think I will go to work on an article and you can all shoot at it and the leaders of the pack can take it up and umbrella it for all of us. Now that sounds like fun. Is that of interest to all of you out in TCI land?



    Proclivity del sur. Container Lucius


  • Admir615th November, 2003

    I think we have different idea's about the definition of "Hard Money". Hard Money Lenders typically will only loan up to a certain % some as high as 70% and I have seen as low as 50% based on an equity position in the property. The idea of using hard $ is that it is available quickly and there is little or no credit qualifying, which will translate into high points & payments. The points are added on

    to the loan amount and is usually re-paid when you refinance.



    Also most of the closing costs can be rolled into the loan and reduce the amount you come out of pocket with at closing. Most hard money loans have terms of 6 - 12 months max, which will allow the investor to close on the property and arrange other financing.



    This is what comes to mind when I think of Hard

    Money. Otherwise a person with a 680 middle score can qualify for almost any conventional

    financing with more favorable terms. There are

    many sub-prime lenders out there calling themselves Hard Money Lenders and I am more inclined to think you are talking about sub-prime not Hard Money.


  • BobPovenz4th November, 2003

    What kind of forms are typically used? If I wanted to make Hard Money Loans, or get one, what is the best source for written, detailed guidelines?

    • KyleGatton5th November, 2003 Reply

      The guidelines are dependant upon the lender. Most will want the appraisal value, cash flow if any, your experience and credit, etc etc. Try to look at it through the lenders eyes, if they have to foreclose is it profitable to do so? Also are they gauranteed a safe return on there investment as it is or how would you change it to do so.



      Kyle

  • KyleGatton5th November, 2003

    I fully agree. If at all possible private monies obtained to purchase property would be more favorable than to pay the higher costs of Hard money lenders. But sometimes the deals and private monies dont line up. In cases like this hard money is available. I appreciate your history lesson, I did not know the history behind where the terms came from.



    Thanks,

    Kyle

    • GFous6th November, 2003 Reply

      Kyle-



      SO....what is a hard money lender? When you guys use the term you are talking about the mezzanine financing? A lender that loans on the merit of the deal, not the borrower?



      I am also uncertain about the term private money lender.



      Gregg



      Gregg

      • KyleGatton6th November, 2003 Reply

        Hard money is essentially for hard deals higher interest for higher risk. Mezzanine(or bridge ) is considered hard money "type" of loan. Hard money would be the classification and Mezzanine would be the sub category.

        Private money lender means any individual lender that is not affiliated with an institution.

    • Lufos6th November, 2003 Reply

      The term Hard Money was coined by Max Foster of Foster Mortgage Co. in Los Angeles Calif. This Co. in the early 30's up to late 40's had a group of Private Parties who lent money thru them. Thus was born the term "Hard Money". Max made a commission on every loan. He did not use title insurance just an Abstract prepared by an Independent Title Searcher who worked for most of the attornys in town.



      All other forms of real estate lending were done by various banks and other institutions. For a time in the early 50's Capital Company which belonged to Bank of America also made these types of loans at high interest and high points. The casualty rate was high.



      From these beginnings in the early 50's came the many specialist "Hard Money" Mortgage Companies that opened up on Wilshire Blvd. Gould, Reliable, Superior and the beat went on.



      In my opinion it is part of a necessary survival education to know of these historical precedents.



      Real Estate is never stationary but responsive to Social and Economic changes. By studying what has occured in the past, you see clues as to what is applicable now and what will be happening in the future.



      A study of Hard Money Lending leads to an examination of the phenomenom known as "The Deal Shop" which is just now reforming on the horizen.



      Practitioners in Creative Real Estate Intrusions such as you the readers, should consider this as the vehicle in which to ride the wave of change.



      You Gentlemen and Ladies may labor at the oars if you like I prefer to handle Sails and Tiller a much easier ride.



      Besides who wants to hang out with a sweaty sailor?



      Parentheticaly Lucius










      • rma1397th November, 2003 Reply

        k...................,

        so your'e suggesting being re "hard money" would be???????????

        Regina

      • GFous7th November, 2003 Reply

        Lucius-



        Now THAT was a good hard money primer. Thanks.



        By the way, I had lunch with a retired bank owner ( bought and sold banks during the S and L crisis - and retired young) . I asked him what hard money lenders were. His short and to the point answer, was, "Lenders that loan on the deal, not the borrower"



        Thanks for your input Lucius,



        Gregg

    • Lufos7th November, 2003 Reply

      Dear Gregg,



      You are right on. In the hard money mortgage companies. Credit was almost never really considered. These are the days a little before the 1003 form.



      The Hard money lender was concerned with equity. Was he covered if he had to foreclose.

      That was the major consideration. Remember as time went on to hold lenders and make those 10% commissions you became more and more protective of the lender. Besides on a successful foreclosure there was money to be made on resale or rehab of the property.



      So, if for example now days we could set up some form of recourse deal. You could have all the hard money you needed for your transactions. The Private Party Lender just really wants a high yield, cause many times he is retired and living off of his invested nest egg. Got any Ideas? I am all ears, well I am anyway. My wife keeps saying I should move to India and fit right in.



      Querulous. Lucius

  • leonsmith1112th January, 2005

    Who is a private money lender,mezzanine lender, or HML for the purpose off flipping properties with "no money down". The credit(FICO) will be in excess of 700

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