For those who have never obtained a hard money loan, there are typically a lot of questions. Here are some of the most commons questions and answers about private and hard money loans:
1. What exactly IS a hard money and or private money loan? – A hard money or private money loan is a non-bank loan. Whether the source of the loan is a private individual, a fund, or an insurance company, a hard money or private money loan is any loan that comes from a non-bank source. Interest rates charged are typically higher than a bank loan, and loan terms are much shorter. One can expect to pay between 7% to 18% interest, and the loan term offered is between 90 days to 2 years.
2. Do some hard money lenders offer longer loan terms such as a 15, 20, or 30 year mortgage? -Typically a hard money / private money lender will provide a loan for a term of 90 days up to 5 years. Most hard money loans are made on a short-term basis. It is very rare to find a hard money or private money lender that will offer a loan term for longer than 5 years, however there are some exceptions.
3. Will a hard money lender give me 100% of the purchase price like the old days of hard money lending? – Before 2007, it was common to find hard money loans that would give you 100% of the purchase price of a piece of real estate. Since the real estate crash however, most hard money lenders will only give you a loan for a percentage of the purchase price. And these days, more emphasis is placed on the borrower’s ability to bring in a significant down payment. With most hard money loans, be prepared to bring in between 10% to as high as 50% on some real estate.
4. What if I have a bankruptcy, short sale, or a foreclosure on my credit? Can I still get a hard money loan? – Although there are some hard money lenders that will not make a loan to you under these credit-based circumstances, there are many that are still willing to make you a loan even if you have these types of marks on your credit report.
5. What kind of collateral can be used for a hard money loan? – Although most hard money lenders only use real property as collateral (real estate), there are some hard money lenders who will use jewelry, recreational vehicles, and other types of collateral to make a loan. However, it is difficult to find hard money and private money lenders that will accept such collateral. Most hard money lenders want to use real estate as the collateral for the loan.
What are some other questions you have regarding hard money loans?
Many of our real estate investors have commented recently that they were busier in 2010 and 2011 than in 2012. For example, one of our most active investors told me recently that he successfully completed 10 deals in 2010 and in 2011 was able to complete 15. “This is excellent,” I said. But then he told me that in 2012, year to date, he’s only successfully completed 3 deals, with one deal currently in the works.
“So, what’s going on?” I asked him.
“There are many factors,” he explained. Some of the more obvious factors are of course the slowing down of the release of inventory coupled with a splurge of new buyers entering the market because of low interest rates. “The big wave is over,” he flatly told me.
But what about the recent announcements that some of the larger banks will be releasing some new inventory in the last quarter of 2012? No one has a crystal ball, and of course, no one really knows what plans the banks have. We will just all have to wait and see how the rest of this year unfolds.
But for now, I’m curious to hear from some other real estate investors out there. How many real estate deals have you successfully completed this year? Was it less than in 2010 and 2011? Please share.
Jennifer Bradshaw and her husband own a successful bridal shop in Salt Lake City, Utah. The business is thriving in it’s 6th year and it is cash flowing. Both Jennifer and her husband have stellar credit and good cash reserves. There’s a small amount of debt on the commercial building they own and run their bridal business out of, around 50% LTV. They are due to refinance the commercial loan on the building and are unable to refinance. The bank that has the loan currently, wants it off their balance sheet. Another bank just declined the loan for the sole reason that they don’t feel comfortable with the property being a single tenant building.
I hear a story just about everyday about a borrower with incredible credit and assets who has been declined for a commercial loan at the bank. With the exception of smaller, local banks that are lending on commercial properties under $1 MM, it is still tough for most borrowers to qualify for commercial loans in the current market. For Multifamily and Assisted Living properties, FHA financing is out there for properties and borrowers that qualify, but can take up to 9 months to complete the loan process and close. Many commercial real estate investors have had to turn to hard money and private money lenders to bridge the acquisitions of such properties.
Many of the larger banks are trying to raise capital and this means deleveraging their commercial assets from their balance sheets. The five year, commercial loans that were written in 2006 or 2007 are coming due, and many banks are telling borrowers to go to another bank for the refinance. Not only have values declined, but occupancy of these same commercial properties has also taken a nosedive in some cases as well.
Because commercial real estate is the backbone of business in this Country, commercial lending is crucial. With commercial bank loans in scarce supply, without the availability of private and hard money lenders to provide bridge loans during these tight times, many commercial real estate investors would have no other options.
When she first came to me with an investment property she wanted fix up and sell, Doreen Harlsway of Salt Lake City, now retired and 71 years young, had just completed an expensive training course on real estate investing. At first I eyed her with skepticism of course, wondering if she thought this was going to be an easy ride.
She was buying in a neighborhood in Salt Lake City, Utah called “Sugarhouse,” that scores big points the B to C buyers. Her ARV was $145K and she was buying at $94,000. Rehab was $9K. Her partner in the deal was to oversee all of the rehab. The comps for the ARV checked out, as I know this area well, so I was intrigued by the deal. I met with Doreen and her partner, and they seemed like they had the best intentions and the right answers to my questions.
Well, the retired lady Doreen, was nervous as a hen nearly every day after the purchase closed on the house. She had a big chunk of her retirement cash locked up on the deal. But luckily, her partner made sure the rehab was completed in a little over 3 weeks and the property was listed this Spring for $150K. Spring flowers blooming on the little sidewalk out front, and the grass already full and green, Doreen accepted an offer for $145K with only 16 days on the market!!
Doreen has since paid us off, and now she’s celebrating big time. She’s a lot better off on her retirement nest egg on this one, little real estate deal. This is what I call a success story. Congrats Doreen!! She could not have qualified for a traditional bank loan to do this. We provided her with a real estate loan or private money loan, to make the deal happen. Click here to find out how you can become qualified for a real estate loan quickly and easily.