Because the private money lending industry is largely unregulated, people ask, “Are hard money loans safe?”
Today I’m going to try and answer that question for you and some more.
Are Hard Money Lenders predatory?
Can a hard money loan go bad and get me in trouble?
What are the loan scams out there that I should avoid?
Those are the three most common questions that go along with the bigger question which is, “Are hard money loans safe?” Here are a few red flags to look out for to determine if your Hard Money Loan is safe.
The first question you want to ask yourself when getting a hard money loan is:
“How do you know this lender?” That’s a huge question.
Did you find this lender online?
Was this lender referred to you from someone that you know?
Avoid Bait and Switch Lenders.
Now, if you want a safe Hard Money Loan, don’t get involved with a predatory or “bait and switch” type of lender.
A hard money lender should be referred to you by someone that you know that has closed a loan with them before. If you find a lender online, and you don’t know anyone that’s ever closed a loan with that lender before, that’s going to require you to do a lot more homework, a lot more due diligence on that lender.
Do your due diligence on a lender like you would do on an investment property that you want to purchase. Before the loan closing, make sure you read the loan documents that the lender is going to have you sign at the loan closing.
Read the loan documentation
For example, the promissory note, the mortgage document, or deed of trust. Whatever documents the lender is going to have you sign as part of the loan, read the documents in great detail and study those documents prior to closing on the loan and signing those documents.
What are the late fees?
What are the default clauses, or default penalties, in the note or the mortgage document?
And then, what will happen if the loan comes due and you don’t pay the loan off by the time that it’s due? Are they going to charge you a 5% “maturity penalty”?
For example, if you don’t pay the loan off by the maturity or due date? Are they charging 5%? I mean, if it’s a $100,000 dollar loan, that’s a $5,000 penalty.
So make sure you know what the loan documents say before you close on a loan with a hard money lender. And why? Because if you get yourself in a bad loan, that is certainly not a safe place to be.
What’s Your Payback Plan?
And then finally the third question that you want to ask yourself to determine if this hard money loan is safe or not is, “What’s your plan for paying that loan back?”
Do you have one? Because I’m going to tell you, a really unsafe place to be, is in a hard money loan for which you don’t have an “exit strategy,” or a way to pay it back.
Know what your exit strategy is, for the hard money loan, before you get into it.
How are you going to pay that loan back?
Is it a refinance?
Are you going to sell the property?
Are you getting liquidation of an asset over here that you’re going to use to pay this loan off? Have multiple exit strategies and know how you’re going to pay that loan back before you get into it.
Did this video answer your question about, “Are hard money loans safe?” If it did, please like this video and share it with someone you know that may have the same questions.
A lot of people, they’ve never done a hard money before, so they have a lot of these types of questions.
Questions like, “Are Hard Money Loan safe?” Share this video with them, like it, and if you have any questions, leave them in the comments section below.
This is Corey Dutton. I’m a private money lender. Thanks for watching!
Don’t Make This Deadly Real Estate Investing Mistake!
This is Corey Dutton. I’m a private money lender. And today I’m going to give you a little “Real Estate Investing 101.” So, you’re a beginner investor, a beginner real estate investor.
How many investment properties can you handle?
Don’t take on too many projects and so you will prevent yourself from crashing and burning. I see this happening all the time, new real estate investors that have a one size fits all mentality. And what do I mean by that? I mean that they look at other real estate investors doing multiple deals simultaneously and they say, “That’s what I have to do. That’s where I have to be.” And that’s not true.
One size doesn’t just fit all. Not in real estate investing. And this is the biggest mistake that I see beginning real estate investors make, which is, taking on too much and not having enough cash flow to support the multiple deals that they have going on simultaneously.
There’s a lot of real estate investor education out there that encourages you to be able to quit your day job and have multiple projects going on simultaneously so that you can’t be a full-time real estate investor. The problem with that is, again, the “one size fits all” mentality.
That may take you five years to do, where it may only take “Ed” the guy over here a year to do. So, keep that in mind. Don’t drink the kool-aid that you’re getting from these real estate investor education courses that push you to become a full-time real estate investor before you’re ready.
The Story of a beginner real estate investor who crashed and burned.
Seth is a beginning real estate investor who came to us for a hard money loan to fund his first rehab deal. We funded that rehab purchase for Seth, and we funded a few deals after that for Seth, and on every one of those deals, Seth made money. But after about the first year, Seth decided that he had to be like those other guys, he had to do it.
And so what did he do? Seth took on too many projects at once. And what happened? How did that happen?
So in this story, Seth purchased one rehab that we did a loan on, and that rehab took forever to sell. There was just something about that property, and it just kept falling out of contract. Meanwhile, while he was rehabbing and trying to sell this property, he purchased two more properties!
So Seth had three rehab projects going on, with three different hard money loans. So what happened? I mentioned to you, that the first property that Seth had purchased was not selling, it was taking forever to sell and had fallen out of contract many times.
Well, Seth’s plan, his “exit strategy” was to get the funds from that first rehab and use them to rehab the other two properties.
But when that property, that first property didn’t sell, Seth quickly found himself in a downward spiral. And why?
Because he had three hard money loans on three different properties, one of them wasn’t selling, one of them wasn’t rehabbed yet, and the other was also still sitting.
And when you have a hard money loan on a property, you’ve got a monthly payment. Not only that, but you have a cost of hazard insurance.
So, you’ve got three major expenses in these rehab projects:
• Rehabbing them,
• Making interest payments on the hard money loan that you use to purchase the property,
• Keeping insurance on these properties.
• Not to mention all the utilities and other expenses associated with maintaining these properties while you own them.
So what happened to Seth in this example?
The first house wasn’t selling, he didn’t have money to rehab the second and third project, he didn’t have money to make payments on the hard money loans, and he didn’t have money to make the insurance payments. So the houses weren’t even insured!
So, the lesson learned here with this story about Seth is, don’t take on too many projects unless you know you’re going to have the cash flow to support the rehab, the interest payments on the hard money loans, and the insurance payments at the bare very bare minimum.
So if you’re a first time real estate investor, and you’re going out looking for hard money loans to purchase your rehab properties for “fix and flip,” remember the story about Seth, don’t take on a “one size fits all” mentality and end up in that position where you do not have sufficient cash flow to support the projects that you have on hand.
How do you calculate loan to value ratio?
Loan To Value Explained
I’m Corey Dutton and I’m a lender, today I’m going to talk to you about a term that is commonly used in lending, whether you’re a borrower or a lender. The term is “loan to value” or “LTV”.
What does Loan to Value mean?
You’re going to see that term a lot when you’re looking for a loan. And what does that mean? “Loan to Value” is simply the amount of the loan divided into the value of the property.
I’m also going to tell you why that’s important to the lender and to you in a minute. But let me go into an example super quick about how to calculate that.
How to calculate LTV Ratio?
I mean, how in the world do you calculate the loan to value ratio? Let’s just say that you are getting a loan for $50,000 USD. And what’s the value of the property?
Let’s say the value of the property is $100,000 USD. How are you going to calculate the loan to value or the “LTV”?
In this case, we’re going to take the $50,000 loan amount that we’re trying to get, and we’re going to divide it into the value of $100,000. And that’s going to give us: 0.50 or 50%. So, that’s a “50% loan to value” loan. When you you’ve got a loan amount of $50,000, and the value of the property is $100,000. Now why is that important?
Most of you are just shaking your head going, “So, now what?” What does that all mean to me as a borrower? And what does that mean to a lender?
What is a good loan to value ratio?
Well, let’s do another example super quick, 50% loan to value. You have no reference point. It’s hard to tell, is that good? Is that bad? Let me give you another example. Let’s say you’re taking a $90,000 loan against that $100,000 value property.
You’re going to divide $90,000 into $100,000, and that’s going to give you: 0.90 or 90% loan to value. So, you’ve got an LTV way down here at 50%, and you’ve got an LTV or loan to value way up here at 90%.
How does LTV affect interest rates?
Why is that important and why does it matter? Well, the lower the loan to value, the lower the cost of the loan, and why? Because the lower the loan to value, the lower the perceived risk of the loan by the lender. And on the other side, the 90% loan to value loan is a higher risk to the lender.
The higher the loan to value, the higher the risk to the lender. The lower the loan to value the lower the risk to the lender. And how does that translate to you as the borrower?
The lower the risk, the lower the cost of the loan or the interest rate.
The higher the risk, the higher the cost of the loan, and the higher the interest rate.
7 Hard Money Tips That Will Keep You Out of Trouble
I’m Corey Dutton and I’m a private money lender. Today I’m going to give you some “Hard Money 101.”
This topic is about, 7 Ways to Get Yourself in Trouble With a Hard Money Loan.
Hard money loans can be great! They can make real estate investors a ton of money. But if you’re not using these loans properly, they can get you into a lot of trouble.
Let’s talk about 7 ways that hard money loans can get you into trouble:
#1: The lender not funding and losing your earnest money:
This a huge way that you can get into trouble. You go to a lender and you’re depending on this hard money lender to fund your loan by your deadline or you’re going to lose your earnest money. The lender drags its feet, wastes a ton of time, and then declines your loan. If this is a purchase, this means that you’re going to lose your earnest money. That’s a huge risk. So make sure you’re aware of that when you engage a hard money lender on a purchase transaction that you need to close quickly.
#2: Paying Upfront Fees to a Hard Money Lender: Paying upfront fees such as appraisal fees, inspection fees, attorney fees, and then never getting a loan? That’s a really fast way to get yourself into trouble with a hard money loan, particularly if you’re going out to multiple lenders trying to get a loan and each one of them wants an upfront fee. And then not one of the lenders actually funds the loan? This is a huge risk to watch out for when looking for hard money loans.
#3: Getting Involved With a Predatory Lender:
Let’s face it there are a lot of hard money lenders out there that just want to own your property. Their intent is that you will default on your loan, or that you will make some sort of mistake and fall behind on your payments, and then they’ll foreclose on your property. Their intent is that they’ll make all the profit on the property and not you!
There are a ton of private money lenders out there that are predatory. That’s one reason why you should be dealing with a professional or licensed private money lender if possible.
Do not mess with these random people out there who are not professional lenders that say to you, “Oh sure, I’ll lend you the money!” Because guess what? Those people are typically going to be the most predatory because they aren’t professional, legitimate private money lenders.
Let me give you 2 examples: I know a borrower that was doing a flip. She had a loan with a hard money lender for 90 days. He didn’t give her any copies of the loan documents at closing.
And according to the loan documents, if she didn’t pay that loan off within 90 days, on day 91 she got slapped with a $15,000 fee!! So guess what? That lender just goes out and buys himself a new car on day 91. And then he tried to foreclose on her property after it was all repaired and ready for resale. This is a prime example of predatory lending at its finest! Watch out.
Let me give you another example. I had another borrower that borrowed money from an unlicensed private money lender that was in her real estate club. This was just some random business associate that the borrower met via the local real estate investment club. This private lender gave the borrower a hard money loan on a handshake for a 90-day loan.
The 90 days go by and this private lender slaps this borrower with an extension fee of 2 points a month, or 2 percentage points of the loan amount per month. On this loan, it was $5,000 a month she was paying in extension fees! The lesson learned is to be sure to read the fine print in your loan documents and watch out for predatory lenders like this! If they are not professional lenders or licensed, stay away! Sometimes you think you’ll get a better deal by getting a loan from a private individual, “friend,” or a business associate, but you won’t.
#4: Not Having a Solid Exit Plan to Pay the Loan Off in a Short Period of Time:
You’ve got to have multiple exit strategies on these loans because these are short-term loans with high-interest rates. Let’s say you don’t sell the property in the time that you think you’re going to sell it? Or, let’s say your exit strategy is to refinance the loan with another loan, and you can’t get approved for that loan?
Guess what? If you can’t pay the loan off in a short period of time you’re going to be paying an extremely high-interest rate for months, and months, and months. And eventually it’s going to catch up with you, eventually you’re going to fall behind on your payments, and eventually, that lender is going to foreclose on your property.
So make sure you have a solid exit plan and always know what you’re going to do if this happens, or that happens, in all different types of scenarios. Because you can’t just count on one exit strategy.
#5: Underestimating your Project Costs or Experiencing an Injury or Illness: Let’s say you’re doing all of the work on the property yourself and it’s a rehab. If you hurt your back for example, and you’re the one that’s doing the work, how will you finish the project within your budget?
I’ve seen it happen. One of my borrowers was doing all the work himself. He didn’t have a contractor, he was in there doing all the sweat equity himself. Guess what? He hurt his back. He couldn’t go back on that job, and he couldn’t afford to hire a contractor to finish it, otherwise, he would go over budget. So he got himself into trouble quick!
I’ve also seen borrowers that underestimated their project costs from the start of the project, which is a very common thing that new real estate investors are going to do. And that’s a really quick way to get yourself into trouble with a hard money lender, because if the hard money lender is giving you rehab money and they’ve given you a certain amount for your rehab, and then you go over budget.
Where are you going to get the rest of the money to finish the project? Are you going to be able to go out and get another loan from somebody else? Probably not.
#6: Market Collapse:
If your plan is to buy a property and in 4 months, 6 months, after you fix it up and add a bunch of improvements you’re going to resell it. What happens if the market collapses in that time frame? That’s a huge way to get into trouble with a hard money lender because you are stuck paying on a high-interest rate loan. If you can’t sell the property for what you’ve got into it because the market collapses or someone lists a better house for less money on the same street? What will you do?
#7: Getting into Too Much Debt:
This is called “over-leveraging” yourself. Leverage is debt. So if you’re over-leveraged, it means you have too much debt.
I’ve seen borrowers take out a first, second, and a third mortgage on a property to get it purchased and rehabbed. And then guess what? They’re paying the interest payments, interest payments are high, beginning to stack up, and then all of a sudden before they know it, they owe more money than the property is worth!!
With the interest and the fees you’ve paid to hard money lenders, there’s probably not going to be a lot of profit left there for you if you get into too much debt.
In conclusion, make sure you know what you’re getting yourself into when you take out a hard money loan. Please spread the word and share this video with someone that you know that may be out there looking for a hard money loan for the first time. Or someone that you know that maybe doesn’t understand all of these risks because it’s important to know what you’re getting yourself into with a hard money loan.
Like I said before, you can make a ton of money using hard money loans in real estate, but you can also get yourself into a lot of trouble if you don’t understand all of the risks.
If you have any questions or comments about this post or any of the risks I’ve discussed here, please leave your comments in the comments section below.
Beware of Broker Chains and Joker Brokers
Beware of broker chains and excessive broker fees. A “good” loan broker can get your loan funded quickly. (A broker is someone that takes your loan directly to the lender to get funded). A “good” loan broker is worth its weight in gold!
Any fee you pay to a “good” loan broker is money well spent. And why? Why not go directly to the lender? A good loan broker knows all the “real” lenders because the good broker has worked with all of the real lenders before. A good broker is going to submit your loan to multiple lenders simultaneously. And what does that do? That increases the chances that your loan is going to get funded!
Now what is a “bad” broker that you want to stay away from, and why are they bad? Let me tell you more. A “bad” broker, I like to call them “Joker Brokers.” A bad broker doesn’t know who the “real” lendersare. A bad broker is going to just take you to another broker, and then that broker is going to take you to another broker, and then that broker may or may not be connected to a “real” lender. So, before too long, that bad broker is going to get you involved in what’s called a “broker chain.”
Now what is a broker chain? You may or may not have heard this term before, but it’s exactly what I just described. You go to a bad broker and this broker doesn’t know who the real lenders are. They haven’t closed loans with any real lenders. They think that brokers, other brokers out there who are actually brokers, are the real lenders. So they’re taking your loan request to a broker, who then takes it to another broker, who then takes it to another broker, and that’s your “broker chain.” It’s a chain of brokers.
So what’s bad about that? Well guess what? You have to pay every, single one of those brokers a fee in that broker chain. And that’s why they’re bad. So if you find out that you’re in a broker chain? Fire those brokers and start over.
Paying Excessive Broker Fees
This brings me to my next topic which is paying excessive broker fees. Watch out for excessive broker fees. This is where I’m going to talk a little bit more about the “Joker Broker.” And why do I call them Joker Brokers? Because as a private money lender these brokers are pure comedy, they are just laughable. Let me give you an example.
I had a broker come to me to fund a deal. He sends me 15 different e-mails in a row about this loan request. And in the subject line of every, single email, there were the letters “FW:” (which means “forwarded”). The broker had forwarded those 15 e-mails directly from the borrower, and each one of those e-mails had infinite number of attachments. But guess what? In all that information the broker sent me, there wasn’t even a loan amount listed! I couldn’t even find the property address!
After hours of sifting through these 15 different e-mails, I went back to the broker and I said, “Yes, we’re interested in the loan, can you tell me a little bit more about this deal?” The Broker didn’t know anythingabout this loan! Nothing. He went blank! But the best part? Within a few minutes he emailed me yet again, and this time he sent me his “fee agreement.” I opened it up and I just about fell off of my chair. This is where the comedy comes in. This is where I say these joker brokers are just laughable.
Guess what it was? It was 5 loan points he wanted as a broker fee! 5% of the loan amount as a fee for forwarding me a bunch of e-mails from the borrower, and not knowing one snippet of information about the loan request! (It was a $3.5 MM loan amount with a fee agreement of 5 points, 5% of $3.5 MM is a $175,000!) He had done no work, he had just forwarded me all of those emails with attachments from the borrower directly. The broker didn’t even know the loan amount, or the property address, off the top of his head when I called to discuss the loan with him.
So I laughed in his face. And you know why? Because I don’t want to deal with a borrower that would sign such an agreement and pay a lazy broker like that an excessive fee. Why? Because it proves they’re stupid. And if you do the same thing when you’re out there looking for money, you’re probably going to get laughed out of the room just like he did. Let me give you another example of a joker broker.
These joker brokers send me e-mails and they’re attaching all of this sensitive information, private information, about the borrowers. And in these email attachments you’ve got social security cards, you’ve got driver’s licenses, you’ve got tax returns! This is sensitive information! Most asset-based lenders don’t even ask for that stuff until they’ve preliminarily approved the loan request, if at all. But these joker brokers, they’re sending this sensitive information to a private lender in the first e-mail, and guess what? Not even a loan amount listed! Not even a property address listed! Again, this is why I call them “Joker Brokers.”
If you’re looking for a loan, a “good” broker is worth its weight in gold. But a “bad” broker that creates “broker chains” and charges excessive fees is going to cost you time and a grip of money. And if you’re a borrower, and you’re out there looking for money, make sure you know what broker you’re dealing with, and determine pretty quickly, is this a “good” broker or “bad” broker?
And if you’re a broker that’s watching this, and you’ve taken offense because maybe you’re doing this kind of stuff? You might want to change your business model because it doesn’t work for private money lenders!
If you have any questions, complaints, or comments, please leave them in the comments section below. If you found this post useful, or you know someone looking for a loan that’s gotten themselves in this position with a broker, share this post with them!
What Is a Hard Money Loan?
Why is it called a hard money loan?
A hard money loan is called such because for any loan you must have some form of collateral. In order to get that loan and in this case it’s called a hard money loan because you’re using a hard asset. Now what is a hard asset? It’s any asset like real estate that can be liquidated quickly for cash.
Why do you get one?
Hard money loans are commonly used by real estate investors to either purchase or refinance real estate.
Also anyone who has a piece of real estate and wants to refinance that piece of real estate and pull the money out and use it for other purposes such as for a business or investing.
Still have questions or looking for hard money loan? Leave your comments below. And if you found this useful Please Like and Share.
How to get a hard money loan in 24 hours
Every day someone approaches me and they wanna close a loan quickly sometimes in 24 hours. So how do you close a loan quickly in 24 hours or in say a week. Well I’m going to tell you what you need to close a loan quickly. So what do you need to close a hard money loan quickly?
1. The Purchase Contract
If it’s a purchase you need a copy of the purchase contract. And that’s the entire purchase contract. Any addendums that have been signed together with that contract need to be provided to the lender as the full contract. So make sure you have a copy of the entire contract ready for the lender.
2. Preliminary Title Report Number two you’re going to need a title report a preliminary title report. The lender is going to want title insurance on their loan on this property. So you if you don’t have a preliminary title report ready to go. Make sure you have at least the title companies contact information that the lender will use to then offer that a preliminary title report to prepare for the closing. Number three, escrow, escrow contact information. In some states that title and escrow is the same company so in some states you don’t need to worry about this third item.
3. Title & Escrow This third, this third requirement to close your Hard Money Loan quickly. But in some states the title company and the escrow company are two separate entities. So make sure you have the contact information for the escrow company that will be handling the escrow part of your transaction and give that to the lender so that they can set up the closing and the funding with the escrow company as well.
4. Access To the Property Typically a lender is going to want to know what is the access to the property. Can I get in and do an inspection? Is there someone in there? and it’s not possible to access? I’m going to need to do a drive by? What is the access information? Is there a realtor that’s going to let me in? Are you going to let me in? Provide the access details, access information to the lender immediately as well so the lender can coordinate a site visit or a walk through to view that property.
5. Property Value What is the property value? That is going to be the lenders primary question in this whole approval process. If you have a comparative market analysis (CMA), give that to the lender. If you have a broker’s price opinion or if you have an appraisal that’s already been performed. give that to the lender immediately so the lender can satisfy the value question. Which is typically one of the biggest questions that a lender is going to have. What is the property value and how do we prove that.
6. Down Payment The last thing you are going to need to get your hard money loan closed quickly. Know what your cash to close requirements are going to be. Is the lender going to require some form of a down payment? Are you having to cover the loan fees or any other closing costs? If it’s an auction are there any auction fees any transaction fees that you’re going to be responsible for? So know what are your cash requirements going to be to close on this loan.Don’t be taken by surprise at the 11th hour when the lender tells you you need to bring in $12,852.63 and you have only $5,000 .
Hopefully this video has shed some light on the items that you’re going to need to close your Hard Money Loan quickly.
How To Make a Profit Flipping Homes Using Hard Money Loans
Famous reality t.v. shows like ‘Flip or Flop’ or ‘Fixer Upper’ focus on the process but not the profit. They leave out important details like true costs, permitting nightmares, and houses that just won’t sell. Don’t let yourself get caught up in the fantasy of these Hollywood flipping shows. House flipping takes hard work, patience, research, and of course, lots of money.
But let’s dig right in and talk about the money part. It takes money to flip houses and make a profit. Chip and Joanna Gaines of the show ‘Fixer Upper’ have endless Hollywood production budgets for their flip projects.
But how does the average person get the cash to get started in house flipping? The ideal way to do it is with your own cash. But who has cash sitting around like that? Not many of us. Partners steal all of your profits, using family money is often a mistake.
So how do you get the money you need to get started in the business of house flipping? Enter hard money loans.
You may have heard a real estate coach or fellow colleague talk about hard money loans. The name “hard money” kind of hits you in the gut, it has a bit of a negative ring about it. But just like any tool, it can work to create great things, but it must be used properly.
Hard money loans are nothing more than a tool used by successful real estate investors to make a profit flipping houses. But how?
Here’s how to make money with a hard money loan
Find all of the hard money lenders that lend on properties in your target locations. Get well acquainted with their requirements, their process for closing loans, and the price of the money.
Get a bad property in a good location under contract using a proof of funds letter from one of your chosen hard money lenders. This will help you compete with cash offers because hard money financing is perceived to work very much like cash offers.
Close on the property using a hard money loan.
Fix the house and get it on the market and resell it as soon as possible.
Pay off your hard money loan and then use it to fund your next deal.
Even real estate investors who have their own cash to work with rely on hard money lenders to fund their deals.
But why use hard money loans if you have enough of your own cash to do a real estate flip? Let’s imagine that you’re in the process of rehabbing a house and a new property suddenly comes on the market that’s perfect for a flip? If all of your own cash is tied up in the house you’re currently rehabbing, how do you take down the second house? Enter hard money loans.
Advantages Of Using a Hard Money Lender Over a Bank
This Corey from Private Money Utah and I’m going to talk to you about advantages of using a private money lender over a bank. So why would you sacrifice your low interest rates that you’re getting at a bank or credit use private money lender or private money lender on your next real estate purchase.
Well I can give you a few reason to use
Speed Of Funding
The first one is speed, have you ever tried to get a loan from your bank or credit union on an investment property? It takes a while, it can take three or four weeks sometimes longer. Some people yet they’re rare exceptions but most people it’s going to take longer. Speed is the number one reason why you want to use a private money lender on your next real estate purchase.
The second reason, flexibility many private money lenders will allow self-financing. sller carry, seller credits that you’re not going to be able to get with a traditional bank lender that is going to be really stringent on that.
Then the final is no hassle. I can’t tell how many people say yes I can qualify for a bank loan or credit union at great interest rate but the hassle of the paperwork, all the documentation and usually they’re going to require an appraisal which can take time itself often up to two to three weeks to get back from the appraiser.
So those are your top advantages for using a private money loan or don’t lose your deal. I think that would be my last advice for you.
A story of a first time real estate investor he was able to get a property under contract a in a really amazing location at an amazing price. He messed around with credit union too long, for the last several weeks.
There were backup offers and I think that the seller just wanted to get top dollar for that property so when he went to ask for an extension beyond one of the deadlines in the contract. Guess what solar wouldn’t extend and he lost the property. So that alone right there just kind of points all the reasons why I would recommend you using a private money loan on your next real estate purchase.
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13 Different Ways to Use a Hard Money Loan
How To Use A Hard Money Loan
When one thinks of a hard money loan, the most common stereotype is that only someone who is desperate would borrow these funds. I mean, why else would someone pay the high-interest rates associated with hard money loans? Why not go to the bank for a traditional loan? It is actually not for reasons of desperation that a borrower tends to use a hard money loan.
Just because a borrower is inclined to pay the higher interest rates associated with private loans, this does not imply desperation or a “lender of last resort” status. On the contrary, there are countless reasons why a borrower may seek out a hard money lender over a traditional lender. Here’s a list of 13 different ways to use a hard money loan that most people may have never considered:
1. 1031 exchanges: Investors who purchase properties via a 1031 exchange, may be short on funds to close. If the deadline is tight a bank may not make the deadline. Often investors will use a hard money, bridge loan together with 1031 funds to make a purchase.
2. All Cash Purchase and Sale Agreements: Any “all cash” transactions that must close quickly. Hard money lenders can perform very easily on an “all cash” contract.
3. Expiring Contracts: Any buyer under a fading deadline understands how nerve wracking it can be. A fast funding hard money loan is usually a short-term solution to prevent a buyer from losing a contract.
4. Buyouts: Real estate partnerships and business relationships all must come to an end at some point in time. Hard money loans can facilitate buyouts by loaning on real estate so cash is available to buy out partners.
5. Other Business Purposes: Purchases of inventory, materials for filling orders, expansion, tenant improvements, short-term payroll needs. These are all items that business owners can pay for using hard money loans.
6. Bankruptcy Debt Consolidation: A property that is tied up in a bankruptcy can be loaned against, and the funds made available can be used to pay off creditors.
7. Leverage of Unencumbered Assets: Taking loans out on owned assets can make purchases of new assets possible.
8. Short term liquidity until asset is liquidated: Properties that have been inherited or awarded in other legal settlements may require repairs or deferred maintenance, and this requires cash on hand. By taking out a loan against these properties, borrowers are able to have short-term liquidity until they are able to sell the properties or lease them out.
9. Repairs to a property: Many banks won’t lend on properties that are in need of significant repair, but hard money lenders will.
10. Debt consolidation: Repair bills and other debt that has piled up on a property can easily be consolidated into one loan. This can help to lower the monthly debt service in many cases.
11. Short sale, foreclosure, or bankruptcy seasoning issues: A mark on the credit from many years past can prevent someone from obtaining a traditional loan until a certain amount of time has passed. However, hard money lenders will still lend to borrowers with credit issues in their pasts.
12. Loan coming due: Sometimes borrowers wait too long to get loans paid off that may be maturing, or coming due. Deadlines can sneak up, so often borrowers must scramble to pay off a maturing loan with a bridge loan (hard money loan) until they are able to refinance with another bank loan.
13. Vacancy levels exceed bank requirements: Investment properties that are vacant often cannot qualify for bank loans until they are leased up. A hard money lender will lend on a property even if it is vacant.
There are innumerable reasons why a borrower would go in the direction of a hard money loan over a bank loan. Believe it or not, many borrowers of private money could qualify for a bank loan on paper, but choose this type of loan purposely. Many of these borrowers use different types of arbitrage, and for this reason the higher interest rates don’t bother them.
Because we have seen so many different loan scenarios, we understand that it is not the credit score of the borrower that is important, but other factors that weigh in more. Many bank loan underwriters cannot get past a bad credit score to look at the positive factors that could offset the risk in a loan. Often, bank lenders don’t have the kind of flexibility in underwriting that private lenders do, which helps to make “common sense” lending decisions. Hopefully this short article has shed a little light on the many reasons why someone may seek out a private money loan over traditional forms of financing.