QUESTION 1: Are they investors or bankers?

The difference here is huge. Bankers and investors view the world completely different, and this viewpoint will probably color most of how that individual will conduct business. For those of you familiar with Kiyosaki's “Rich Dad Cash Flow Quadrant”: Bankers operate on the left side (either an “E” or an “S” depending on who you are dealing with), and investors operate on the right side of the quadrant.

While both sides are taking calculated risks, a lender who has never been an investor does not know or understand how the investor approaches a deal. This is critical – as you will see later on, you need your hard money lender to understand how and why you want to buy a particular property. They need to “get it” or else it can make acquiring a loan with that company very difficult. When bankers don't understand a deal, they often times will bury you in red tape, and ask for all kinds of additional protection for themselves - at your expense.

The best way to get this question answered: simply ask your hard money lender if they personally invest in real estate, then talk to them about what experiences they have had and what types of deals they have done.

QUESTION 2: How involved will they be in the process?

The more involved the better. Especially for newer investors – this is a safeguard. A hard money lender who wants to stay involved is not only protecting their own investment, they are protecting you! Things like appraisals, inspections, additional estimates, cash-flow analysis, etc. should not be looked at as cumbersome. These types of processes are in place to ensure that the deal is good. Don't you as the investor want to know for sure that your deal is good? You should.

Make sure that this process does not stop when you settle on the property. You don't want your lender to simply forget about you once the deal is closed, but this is exactly what many of them do. Remember that many lenders get their points (payment) up front. A hard money lender that stays involved in the entire process from beginning to end is one that is dedicated to the success of the project – and therefore your success.

QUESTION 3: What about collateral?

Generally speaking, lenders protect themselves by lending at a certain LTV (Loan-To-Value) For example – if a lender is willing to give you 65% percent of the money to buy your property – they are at a higher risk than someone who will only supply 50%. There are, however, other ways lenders choose to manage risk. Collateral is one of these ways.

The collateral issues are directly affected by the answer to question #1. If your hard money lender doesn't understand the investment side, they will try to cushion themselves with additional collateral, to protect their investment. This basically equates to putting liens against anything they can: other investment properties, your personal residence, etc. Some will even go so far as to lien your car, boat, or life insurance. The bottom line is this: hard money lenders who ask for additional collateral are betting you will fail. They are putting themselves in a position to profit if your deal goes horribly wrong. They have already managed risk by limiting their LTV. Any additional collateral is unnecessary. It can tie up your valuable assets, and represents the mindset of someone who does not understand your needs. The investment property they are lending against should be the only collateral required.

QUESTION 4: What are the terms of the loan?

Now we are getting down to the "nitty gritty". This is where we talk about all the various aspects of the loan including: points, interest, term of loan, fee structure, escrows, draws, inspections, pre-payment, minimum/maximum loan amounts, etc.

The best way that I have found to get all the information in an organized manner, is to ask your lender to walk you step by step through a deal, and ask questions along the way. Start from the point you have a deal under contract. What is the application process like? What paperwork do you need? How long will it typically take to close? When do inspections take place? What are the fees? All these questions (plus many more) will help you understand all the terms and conditions of the loan process.

As you have no doubt noticed, the section dealing with pricing has come after multiple other points. This is intentional. Whatever the price of the loan , it will always cost you MORE if you don't pay attention to the previous issues. In my opinion, honest, reliable, like-minded, hard money lenders on your team who are easy to work with and get your deals financed - are worth their weight in gold. The actual cost is completely secondary. That being said, pay careful attention to the next point.

QUESTION 5: What are the HIDDEN fees?

Be very wary of hard money lenders that are cheaper than all the rest. Every hard money lender charges points up front and then interest on the principal. However, there are many different ways to hide fees in the loan process.


New fees are literally being invented all the time. Here is a list of some of the fees you will see with many lenders in the marketplace – this list is by no means exhaustive.

¨ back end points
¨ loan origination fees
¨ document preparation fees
¨ legal fees
¨ emailing fees
¨ wiring fees
¨ inspection fees
¨ faxing fees

Some of these fees are nominal, but some can cost you several hundred dollars. Think about it, if you are doing a deal with a principal loan amount of $50k, every time you pay $500 in fees it is like paying an additional point. Make sure that you grill your hard money lender about these fees – so that you can accurately count the cost of hard money prior to getting into the deal.

Hopefully, these 5 points will help you to decode the sometimes complicated world of hard money. I would also like to offer one extra piece of advice on the issue. Do business with people you like.

One of the perks of owning your own real estate business is that you get to choose who you do business with. Unfortunately, many hard money lenders are difficult to deal with. Rest assured – there are folks out there who understand your needs and will work hard to make your project a success.



USING A HARD MONEY LOAN

Hard Money Loans are a tool! A tool to get you going on the fast track to being able to finance your own deals. Use hard money wisely and you'll get where you need to be fairly quickly.

“No Money Down” real estate deals sound enticing and the late night gurus make it seem as if anyone can get cash back at the closing table on all their deals. Yes, you can do a real estate deal and get cash back at the closing table. Yes, you can buy a property with no money, no job and no credit. But for those of us in the real estate investing business, we know that everything comes with strings attached. The trick is to know what strings you can pull on and what strings will hang you.

Many no money down deals sound great when you hear them on the infomercial, but when you get into the actual mechanics of structuring the deal, you may find yourself dangerously close to committing loan fraud. Since federal prison is probably not your idea of a serene vacation spot, educating yourself is the best insurance to keep yourself away from the scams. Until you have gained enough experience to know when to walk away, remember this basic rule: If a deal sounds too good to be true, it probably is.

One legal way to get into a property and get cash back at the closing table is to use hard money. Hard money is a term used to describe money that is loaned at a relatively high interest rate. Hard money has been termed the “loan of last resort” but that is not the case for real estate investors. Typically, the person who is using hard money cannot use traditional methods of financing such as going to a bank or mortgage company either because their income is not verifiable, their credit may have “dings” or because of the condition or type of property.

Banks do not make hard money loans. Banks look at a person’s ability to repay (credit history, income) and base the loan on that. Hard money is the opposite. A hard money lender looks at the value of the asset and lends based on the loan to value (LTV) ratio. Because these loans are based on the value of the asset rather than the borrower’s credit, the loan to after repaired value ratio is usually 65% - 70% as opposed to a bank’s LTV of 80% to 90%. For example, if a house has an after repaired value of $100,000, a hard money lender will loan a maximum of $65,000 on the property. Real estate investors use hard money to finance rehab properties (that banks won’t lend on ) and to close deals quickly when fast action is required.

The interest rate on hard money loans runs between 10% - 18% and most lenders charge points (a point is 1% of the loan amount) as their fee. For example, on a hard money loan of $100,000 with five points, the amount paid for the points would be $5,000. Most hard money loans are for short periods of time, six to twelve months. 

Hard money lenders, or private lenders, are not “leg-breakers” or shadowy characters. Unless they are lending only their own money, they are mortgage brokers or loan officers who are licensed by the state. The actual people who invest in hard money lending can be individuals, a real estate investment trust, a third party’s self-directed Roth IRA or any other private entity – a corporation or LLC. The fees and interest rates are legal and less than what a lot of credit card companies charge.

At those rates, who would use hard money? Many real estate investors use hard money loans for their deals. There are all sorts of reasons for using hard money as opposed to going through a bank or mortgage company. Many times an investor finds a deal that must be closed on fast. Banks and mortgage companies take a minimum of three weeks and usually closer to five weeks to close a loan. They just can’t move fast enough.

Sometimes a property needs extensive rehab work and banks don’t want to loan on a property that is not in re-sellable condition if the borrower defaults. Hard money lenders know the property is being bought to be rehabbed and they look at the after repaired value of the property, not the value of it as it sits. A bonus to that is if the property is bought at a deep enough discount, many times the hard money lender will include rehab funds in the loan amount. The investor doesn’t have to dig into his own pocket or take out an additional loan to rehab the property.

Paying 15% interest and five points seems pretty steep to those not in the real estate investing industry. But, on a six month turnaround, paying the interest and points on a deal can be a lot better than having to take on an equity partner to finance a deal and then having to split the profit with him 50/50. Most investors would rather pay a high interest rate for a short amount of time than give away half of a deal.

When should you use hard money? Use hard money on deals where you need to close quickly. Hard money lenders can usually close within 5 – 7 days of receiving the information they need on a property. If you need repair money and you have cut a good deal on the property, a hard money loan can be the way to go. The best time to use a hard money loan is if you know you will not be holding a property for more than six months or if you have the ability to refinance the loan out of the hard money in a short period of time.

Hard money loans are not for everybody and they are certainly not for the faint of heart. But they have their place in an investor’s arsenal of tools. Hard money lenders can be found all over the country.

OUR HARD MONEY LENDER, IS IN OUR OPINION, THE BEST YOU'LL FIND ANYWHERE AND YOU CAN GET SET UP WITH THEM RIGHT NOW, RIGHT HERE.

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