By Andrea “Andy†Tolbert
Lately we have heard more and more new (and experienced) investors saying that they would never pay 10, 14, or even 18% to borrow money on deals when they can get loans from their bank or mortgage broker at 6-8%. Now being that we are mortgage brokers ourselves, we love the fact that you’d rather use us, and you probably assume that we would never use hard money since we have access to every loan program in the world, right? WRONG! We love hard money! In fact we have several private loans on properties right now! My purpose in sharing this article with you is to show you the strengths of private money and why you should be using this versatile tool in your real estate investing plan.
Let’s start by outlining what Hard Money is and what it is not:
Hard Money Is: Also called equity based lending, equity loans, private loans, etc., it is a type of loan where the property is the basis of the loan approval. Most private lenders will loan a percentage of what the house is worth, usually 50-70%, regardless of what your purchase price is. Example: If you are buying a house for $60,000 that is actually worth $100,000, you could borrow the entire $60k purchase price, maybe even a little more to cover repairs and closing costs.
Hard Money Is Not: going to a bank, having your credit pulled, giving them 2 years’ tax returns and a blood sample and hope you’ll get approved (although some private lenders do have credit and income requirements). If an Institutional lender approves you for a 70% loan, it will be based on your purchase price, so in the above example, you would have to put down 30% of the $60k purchase price ($18k) and they will give you a loan of $42k. They don’t care if it is worth $100k or $1 million!
Here are some situations where Hard Money is an option you should consider:
1. House is in very bad repair. Regular lenders will not loan on fixer-upper houses (unless you go with some type of a construction loan, and you don’t want to go there!). Regular lenders always look at one key thing: if I get the house back, is it something I can re-sell quickly?
2. House is being “flipped†to you or contract assigned to you by another investor. Some of the regular lenders will not do a loan on a property that has had a title transfer in the last 12 months. Let’s not argue about the stupidity of this, just know it’s true.
3. You don’t have enough money to get a regular loan, put a down payment, and do all of the repairs. Hard Money will usually give you all of the funds to purchase the property and sometimes some repair money too!
4. You don’t have the credit score to get a regular loan. Private lenders realize that you may have some mistakes in your past, but a good house deal is a good house deal, and you are now on your way to being a real estate mogul!
There are also numerous other benefits to using hard money. Don’t get hung-up on the higher interest rate; if the deal is strong enough, it’s the availability of money that’s important, not the cost of money. (If somebody said they would give you $1million return if you loaned them $100k now, does that sound silly? Not if they can turn your $100k into $10million, then that $900k they gave you is really insignificant, isn’t it?)
You’re only using the money for a short time, and remember, interest rates are expressed as an annual rate, so 12% annual only costs you 6% if you pay it back in 6 months. Besides, if you decide to keep the house, you can always refinance it into a regular loan later. Anyways, here are some of the unseen benefits:
1. Private Lenders do not report to the credit bureaus. This is important for 2 reasons: 1st: Your credit score is affected by things such as number of inquiries, number of loans on your credit, number of outstanding loans, etc., so the less that show up, the less it affects your score (this can be a bad thing though if you have bad credit and want this good mortgage payment to show up as a positive). 2nd: If you do for some reason have a late payment or two, this will also not show up on your credit and will not lower your score. Note: if you have a private mortgage that forecloses, that most likely will show up on your credit since it is a matter of public record which may report.
2. Private lenders usually don’t make you jump through hoops of fire to get a loan approval, in fact, once you have a relationship with them, it’s usually just a matter of giving them the address and they’ll ask you when you want to close!
3. Private lenders can close very quickly, sometimes even in a day or two. If you have negotiated a great deal but only have a few days to close it, regular lenders probably can’t help you.
4. Private Lenders can sometimes be negotiated with on their terms. Maybe you’d rather pay your points at the end of the deal when you sell it instead of at the beginning of the deal when it’s out of your pocket: offer it to them, maybe they’ll go for it! I once negotiated with one of my private lenders in the middle of the deal. I had a property that was taking longer to sell than I had expected, and my cash was running out quickly since I had two other rehabs going at the same time, so I contacted my lender and asked if he would let me defer my payments until the end of the loan (that means stop making payments every month and instead tack them on to the total payoff at the end). To make it more appealing, I also told him I would pay an extra $50 per month for each payment I deferred. He jumped at the offer, and my cash flow problems were solved. No regular lender ever would have gone for that.
5. Private loans can also be in second position. There are several instances where this is helpful, but two that come to mind are: 1. you have a seller that will let you take over their mortgage, but you need some fix-up money, or 2. you can borrow the purchase price from one lender, but need money for the fix-up. Another method is to place a second on a property you already own to get the down payment or fix-up money for a different property.
Hopefully this will show you the power behind private and hard equity lenders. Now do you see why we like them so much? Well, I’ve gotta run…I’ve got to fax a proposal to one of my private lenders on a deal I’m putting together!
Andrea “Andy†Tolbert has been actively investing in the crazy Florida market for over eight years. Her passion is teaching other investors some of the secrets she’s learned in both her investing and her other life as a mortgage broker. She can be contacted at Andy@AndyTolbert.com or 407-328-0970. © 2004 rei123.com
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