Hard Money Lenders

HARD MONEY LENDERS

A Hard money lender is a lender who loans money to real estate investors.  Typically the lending period is a short period of time, generally not more than one year, and the interest rates are quite high.

Hard money lenders do have a place in the real estate investment game.  Most flippers, and sometimes landlords, take over property that is not acceptable to a bank for a conventional loan or mortgage.

The use of a hard money lender in a house flipping business is quite common.  The flipper has purchased a house that needs work.  Obviously, for the flipper to buy the house, it is a home that does not command getting sold for a price that would be the normal selling price of the house if it was in reasonable condition.  The flipper has no intention of keeping the house long term, but needs some additional funding to either buy the property or to do the updating and rehabbing work.  A bank will not finance a house in this condition for a short period of time.  In addition, a conventional lender would have too long of a process to obtain the funding.

The whole business plan of a house flipper is to get in, fix it and get out as soon as possible.  Generally a hard money lender can accommodate this need.  They are niche lenders and can do quite well when lending to the right people in the right location with the right value being placed on the property.

If you have ever used a hard money lender you know that the interest rates you find are high.  I have seen rates as high as 5 points and 15 percent ranging down to 3 points and 9 percent.  The most frequent rates that I have seen are 3 points and 12 percent and 2 points and 10 percent.

Usually the hard money lender will require that the borrower have some “skin in the game.”  By that I mean they want to see the investor have some of his or her own money at risk, which is an indication that they will not walk away from the investment.  Also, most hard money lenders want a first position mortgage, and may not allow second mortgages.  They often require payment of monthly interest while the project is a work-in-progress, and they will deduct the points that they are charging from the proceeds of the loan.

For example, if you sign a note with a hard money lender for $100,000 and you are paying 3 points and 12 percent interest, you will actually receive $97,000 at closing (3 points = the $3,000 taken from the proceeds).  You will usually make a monthly interest payment while the working on the house and until the loan principal amount, which is $100,000, is paid at the time of sale of the property.  The lender will also require the borrower to pay all closing costs related to the loan.  Again, hard money lenders certainly have their place, but of course the numbers have to work for the borrower in order to make the job profitable and the borrowing worth it.

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