Not a week goes by that I don’t read on some real estate investing website, the following refrain from some real estate investor, “Where are all of the real hard money lenders??Being an active hard money lender, and knowing of others who do this around the country, this always amuses me. It has become apparent over the years that there has been an ongoing debate about the services that a hard money lender should offer and what criteria is warranted, and in most instances, necessary for both the lender and the borrower. In this article, I hope to explain the changes that have taken place over the years in this important relationship, and what to look for with regard to hard money lenders.
First
I would like to address a prevalent myth. Hard money does not necessarily
imply that the loan is based solely on the equity of the property in
question. This is a very common misunderstanding.?
Many years ago, private lenders (hard money lenders),?used the actual property as its own collateral. If the borrower
paid them back, that was great, but if there was ever a default situation,
that would be fine too. The lender always loaned far less on the property
than the fair market value, so in the long run,?
a lender stood to make an even greater profit by foreclosing
on the property and selling it. So I’m sure that many of you would ask,
how is that any different than today? After all, no hard money lender
will lend more than 65%-70% of the after repair value on a property,
and the high fees and interest rate should more than compensate them
for any inconveniences. So what’s the problem? Why is it so hard to
find private lenders who don’t ask for credit information? Why won’t
they all do “no doc?loans? Where are the real hard money lenders?
Well
investors, here’s something that you have not considered. Years ago,
most states were non-judicial states, meaning that the foreclosure process
was simple, fast, inexpensive, and didn’t involve an involved court
fight. The burden of proof , in many cases, was on the defaulter. Under
these laws, it made sense for the lender to bypass the credit and pay
history of the borrower. Either way, their investment was sound.
So
what happened? Consumer protection laws, and other factors have slowly
changed most states into judicial states. Now the burden of proof for
the foreclosure process has changed. And to further complicate things,
suppose the borrower (real estate investor) rented out the property.
With squatter’s laws as they are today, the lender would really be screwed.
In these instances, the lender has to go through an expensive and time
consuming court procedure. Even though, in the end, the lender will
get the house, the expense and effort has killed the investment, and
if this happened a lot, it would drive them out of business. And in
many cases, this is what happened over the years to most of the equity
only based hard money lenders.
This
is why most of the hard money lenders now will check credit scores,
and in most instances, ask for further documentation such as tax returns,
bank statements, etc. I find that Rehab Funding, as well as most private
lenders, are much easier to deal with, much more streamlined, and have
far less red tape to deal with than a bank or lending institution. The
only difference from those “good old days?is that today we are more
careful about dealing with just anyone. Speaking for myself, when I
work with a real estate investor, I want the legal option to foreclose,
but I want to know that the history of the borrower indicates that this
is highly unlikely.
So
if hard money lenders insist on checking credit, what good are they?
Let me start with the obvious. Most banks and lending institutions don’t
want to touch rehab projects. In stark contrast, this is our specialty
(acquisition and repair money for rehab projects). Even if you find
a bank willing to do a deal with you, will they require a down payment?
If you are buying a property for $50,000, and they require a 20% down
payment, that’s $10,000 out of pocket at the settlement table (and this
does not include standard closing fees which are extra). A hard money
lender, like Rehab Funding, requires no down payment. Also, no bank
or lending institution that would possibly do this type of loan would
fund 100% of the acquisition cost and 100% of the repair costs. If you
buy the property for the right price (Use Cameron Dunlap or Rehab Funding’s
formula for buying properties), Rehab Funding will.
Another
huge advantage of hard money is a quick loan turn around. If you are
bidding on a foreclosure property, an estate sale, or any property from
a motivated seller, your ability to move fast will often determine your
ability to “steal?a property. Banks will normally take thirty to sixty
days to close. This will rob you of a competitive edge. Rehab Funding,
and most private money sources can close within two weeks. Now that’s
a hammer to use when bidding on a property!
One
thing to watch out for are pre-payment penalties. As a real estate investor,
you should never deal with a loan that includes such a penalty. The
faster you work, the more your investment will pay off. Always remember
that each day, you will be paying interest, taxes, insurance, utilities,
and contractors. This comes right off your bottom line, so all of your
incentive should be to flip the property, or finish and refinance it
as soon as possible. So why would you ever take a loan that penalizes
you for finishing quickly? Rehab Funding has never and will never charge
a pre-payment penalty or have any seasoning issues.
And
finally, always ask to see what other advantages come with a hard money
loan that would not be available elsewhere. For instance, Rehab Funding
has a Six Month-No Pay Plan for investors with strong credit. Those
of you who have worked on properties know how difficult cash flow can
be to manage. This plan alleviates this problem, and only a hard money
lender, who deals with real estate investors, day in and day out, would
provide such a great program.
So
don’t use hard money because “they don’t care about your credit? Use
hard money lenders because our programs are tailored to fit your needs
as a real estate investor.
Source:www.rehabfunding.com
