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Hard Money Lenders

By - 2007

Hard money lenders make short term loans (usually 24 months or less), and often charge a fee of as much as five percent or more of the loan amount, and an annual interest rate of up to fifteen percent or more. Why would you want to go to such a lender? Because they take risks and get the money to you fast. These kinds of loans are typically used for the purpose of purchasing and rehabbing houses for a profit, and banks are not often willing to help you out in this area.

Consider the following scenario: You want to buy a house as a fixer upper project. The sellers is looking at a market full of buyers who put in their offers contingencies like waiting for the sale of their house, or applying at various banks and other lenders. But because you are willing to use hard money lenders, and you already have a working relationship with one or more, you get to say "I can close for cash in a week or less." Now that gets the seller's attention right away. It can even mean getting a property for less than other bidders are offering, since the seller knows you will close -- and fast.

How Hard Money Works

Every lender is free to make his or her own rules, of course, but typically you can borrow 65% to 70% of the ARV value. That stands for "after repair value," which will be determined by their appraiser. That's another advantage of borrowing this way. Banks generally only loan based on the existing value, but hard money lenders understand that the property will be worth more when you are finished with it. The loan will also be based on the property itself more than on your credit rating, another reason you may want to go this route.

Here's a quick example:

Suppose you find a house that needs some work. You make an offer for $100,000 and you expect that once you have fixed it up it will be worth $160,000. Note that it is very important to have a clear plan in mind and so be able to estimate both your costs and the eventual sales price with some accuracy. Hard money lenders will have to agree with your basic estimates in order to be interested. Experience and/or good research can help a lot here.

One of your lenders agrees with your assessment of the deal, and so lends you $112,000, which is 70% of the projected ARV of $170,000. Notice that you actually get more than 100% financing based on the purchase price. This is common, but it is also common for part of the money to go into a escrow account to be drawn on for repairs and other expenses as necessary. In a case like this that might be $20,000 or at least the $12,000 that exceeds the purchase price.

In a month you have made the necessary repairs and improvements and a couple months later you have sold the house for $158,000. Your total expenses for repairs and improvements amount to about $11,000. Holding costs (property taxes, insurance, and utilities) and selling expenses are about $9,000. You also paid $5,000 as a loan fee and another $5,000 in interest. That's an expensive loan, but on the other hand, all that really matters is whether it enabled you to make a decent profit. In this example, the numbers look like this:

Price: $100,000
Buying Costs: $2,000
Repairs and Improvements: $11,000
Holding Costs: $1,000
Selling Costs: $8,000
Loan Fee: $5,000
Interest: $5,000

Total: $132,000

Subtracting that from the sales price of $158,000, we can see that you made a net profit of $26,000 on a deal that perhaps no bank would have lent on. That's why people use hard money lenders. The cost of borrowing is not a problem as long as you make a profit in the end.


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Houses Under Fifty Thousand | Hard Money Lenders