Real Estate Lending: Finding Funding – The Hard Money Lender
October 25, 2014
During the series introduction, I listed five funding sources for every investor. In the introduction, I merely skimmed over the five funding options. However, we’ll be discussing each funding option in more detail, beginning today with “HML” or Hard Money Lending.
A hard money lender is a very easy route for investors. Why? Because HML’s are in the business to loan YOU money! It’s how they make money. As I mentioned previously, any investor worth his salt uses or at a minimum, has access to all five lending sources that I listed in the series introduction.
In my opinion, HML’s are the easiest way to access funding. This is especially important for inexperienced investors. These beginner investors have a tendency to become obsessed with finding the cheapest “private” money, meanwhile, there’s an HML right up the road who is in-business to loan you money! Sure, maybe his terms are not exactly what you want but remember, don’t step over a dollar to save a dime! Hard money doesn’t necessarily have to be your only source for funding but it should take priority as the easiest way to get funding for your first flip.
I just so happen to be in the middle of several large flips. I am currently closing on a home with a $500,000 purchase price. Yes, my other flips use other sources of funding, but for this one, I needed a hard money lender because of the price. I am in no-way a beginner investor as I’ve spent over a decade in the industry – but I still use hard money lenders for certain situations. Especially situations in which the purchase price is a little higher and I need guaranteed approval.
How does a hard money loan work?
An HML loans you funds to both purchase and rehab your investment. In most HML cases, one has to come to closing with roughly 10-20% down depending on the lender.
HML’s will give you the option of a six or twelve month plan. I recommend a twelve month plan. Six months can work if everything goes perfectly. But if things don’t go as planned and the home doesn’t sell, the HML can foreclose or charge additional points or interest.
HML’s make their money by charging you points/interest. One point equals 1% of the total loan. Interest will generally be anywhere between 12-18%.
HML’s typically do not charge a pre-payment penalty so one can pay off the loan amount at any time without being charged additional monies.
One will usually receive the rehabbing construction funds in several draws. These draws can be set-up in many different ways. For example, let’s say we have a $30,000 rehab project. In this case, one would typically set-up three separate $10,000 draws. You would then proceed to complete $10,000 worth of work and then would request another draw for $10,000. The lender will then send an inspector to your flip. As long as the work is completed, the lender will release the next $10,000.
Once you prove yourself, HML’s will likely be wiling to do multiple deals with you at the same time. You just need to prove yourself.
Will this option cost you more money? Yes, but it’s paramount that you get the ball rolling. So paying a little more for the loan is definitely worth it for your first flip!
Not only should you locate and consider nationwide lenders, but more importantly, it’s advantageous to locate and build relationships with local lenders. Local lenders are easier to work with and they understand the market in your investment area.
When you finally have found and chosen a specific HML, be sure to do your homework. Study their recent projects and speak with other investors that they have worked with who will provide a reference. This way, you won’t get stuck with a “shark.” There are sharks out there who take advantage of inexperienced investors by having the investor bring them a house, they then will deny the loan and then purchase the home right out from underneath you. It’s a cutthroat world out there, so be sure to cross your t’s and dot your i’s.
In closing, if you’re looking for a lender in your area, feel free to visit my website at http://andrewcordle.com/lender where I’ve directed members of my Team to research, locate, and organize a state-by-state list for lenders in your area. Free of charge! It’s a great list to include in your lender arsenal!
If you’re a lender and would like to be added to our state-by-state lender list, send us an email at website@andrewcordle.com and we’ll add you to our lender list.
