Hard Money Loans – When a Real Estate Investment Needs Fast Financing » RealtyBizNews: Real Estate News
There are many ways to successfully invest in real estate. Hard money lending isn’t that much noticed these days, but it still has a valuable place in the investment world. Coin lenders generally do not value real estate in the same way that most investors and other real estate professionals do. Hard cash loans can be easier to come by, but they can be expensive. Despite the cost, they are an indispensable tool for investors. Knowing when to use hard money and how to get it is crucial.
As an investor, you should know your local market inside out. After a quick tour, you should instinctively have a good idea of property value. What is different for coin lenders is that they often lend money outside of their local market. It can be in a distant city or across the country. Coin lenders cannot physically view the property themselves, nor do they have a solid understanding of local property values.
Every private contract is written for the mutual benefit of both the investor and the lender, but there are general rules that drive the hard money market. Hard money lenders do not use the standard underwriting process that banks use. Banks focus on the borrower’s credit history and income. A bank loan is usually 90% or more of the home value.
Coin lenders focus on the value of the property rather than the borrower’s creditworthiness. While they will look for a professional assessment, it is not the only assessment tool they rely on. Often times, they want at least two and possibly three assessment models to help them make an informed decision. Coin lenders will look through tax bills, but again this is not a reliable method of valuing property. Tax assessment districts calculate values annually at best and many only every two years. In addition, the tax office only evaluates real estate from the curb. You do not have access to the inside of the house.
Broker’s Price Opinion (BPO) is another tool that moneylenders use to value real estate. A BPO is an estate agent’s appraisal of the property’s value. However, hard money providers are also skeptical of these valuations, as brokers tend to overvaluate real estate in the hope of a higher listing commission and an optimistic view of the local real estate market.
The value a hard money lender attaches to a property has nothing to do with the purchase price you negotiated. It is based on the market value of the property.
In the end, tough money lenders take all of the information available to make an informed decision. You ask yourself questions like: “When the market has bottomed out, can I get the money I borrowed for the property back? Will I still benefit from this feature if I have to take control in the event of a payment default? “
To fully protect themselves, hard money lenders typically only loan out 50 to 70% of the property’s value. As an investor, you must either negotiate a purchase price of this magnitude or have additional financing available. Also, remember that a tough moneylender knows the fix-and-flip business as much as any investor does. You want to know your exact plan for the property and need to approve it along with the value of the property.
Most hard money lenders provide short-term loans with an average duration of six months to two years. In general, the greatest benefit that hard money brings is getting it closed quickly. Since there is no credit check, the closing can take place a few days after an application has been approved. Once you’ve established a relationship with a hard money lender, loans can be funded in a matter of hours. A hard money investor needs to know what documents are required to approve the application.
If your ducks aren’t all in a row, funding can take a few weeks, but just three to five days are possible. If you have a trusting relationship with a hard money lender, you may have cash within 24 to 72 hours.
Hard money is not for everyone (or even most people). The only reason to get such a loan is for a large investment that requires a quick response. It can cost you 10% of the loan amount for interest and loan fees. But if you can make 30% on a deal in weeks or months, it’s probably worth paying more for quick funding. When a good investment doesn’t keep you waiting, a hard cash loan may still be the best answer.
What else do you think investors should know about hard money loans? Please share your findings and experiences by leaving a comment.
Additionally, our weekly Ask Brian column welcomes questions from readers of all levels of real estate experience. Please email your questions, inquiries or article ideas to [email protected].
Photo by Frederick Warren on Unsplash
Author Biography: Brian Kline has been investing in real estate for more than 35 years and has been writing about real estate investing for 12 years. He also has over 30 years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives in Lake Cushman, Washington. A vacation destination near a national and Pacific ocean.