Gap Financing: What you didn’t know

Gap Financing, it’s something most real estate investors don’t know about. I’m going to tell you about You’ve got a property you’re looking to purchase and you’ve got a hard money lender that’s willing to give you the majority of the money that you need for your deal. But you’re short on cash. You’ve gone to family and friends, people in your network, possible business partners, and you’re asking all of them for money to fund the “gap” you need to buy this property.

I am going to tell you how to get a lower cost of capital from these people that you’re asking to “fund the gap” on your deal. By structuring the funding the way I am going to tell you to do it, you are going to give your gap lenders a better feeling of security so you have a higher likelihood of actually getting that money from them!

Most people, when they go to family members or friends for capital to invest in their real estate deals, they approach them as a possible partner or as a joint venture (JV). Don’t do it!
gap financing

Why not partner or JV? Because you’re going to be giving away a larger percentage of your final profit to that person if you partner with them on a deal!! You’re also going to have to deal with the hassle of having a partner.

If you’ve had partners or family and friends get involved with your real estate deals, you know it can cause you a lot of anguish and stress. Don’t do it!! What do you do instead? Approach these people for a “loan” or debt, instead of a partnership or a JV. You’re going to approach them for what’s called a “gap loan.”

What is Gap Financing?

Now, what exactly is a gap loan? A gap loan is a debt, like a mortgage, and it’s going to be the amount you are short to purchase or rehab a property.
For example, let’s say I’m a hard money lender and I’m going to give you a loan for ninety percent (90%) of the purchase price. You’ve got to come up with a 10 percent (10%) down payment and your repair money. So in this example you are short on the 10% down plus the funds you need for repairs. This means you will need a “gap loan” for that 10% down and the repairs money.

If you’re going to go to a family member, a friend, to ask for these funds you are lacking, now you’re going to say, “Make me a loan on this property, and in exchange for that, I’m going to give you a secured lien on this property.” That sounds a lot better than saying, “Give me the money to invest in this fix and flip property.”

And how is the gap loan structured? Well, the hard money lender is going to do a loan in a first position on that property. And your gap lender is going to do a loan in a second position on that property. Both the hard money lender and the gap lender are going to have secure lien on the property.

And why is a gap loan better for them than partnering with you? Well, rather than them wiring you the money and hoping and praying that your deal is going to work out as it should, they actually get a lien on that property. And if things don’t go as planned they have a secured interest in the real estate.

Real-World Example of a Gap Loan

Let me give you a real-world example of how a gap loan works. We were going to give Nicole a hard money loan to buy a fix and flip. She was short by $30,000 for the amount of money she needed to bring into the deal.

She goes to her uncle and she asks her uncle for a loan. Her uncle checks out the property. He likes what she’s doing. He’s willing to give her the $30,000.

Rather than do a partnership or a joint venture agreement with her uncle, Nicole has structured it as a gap loan, whereby her uncle is going to give her the $30,000 and in exchange for that $30,000 she is going to give him a flat fee of $2,850 when the house sells rather than paying interest. Not only that, but she is going to sign a promissory note with him and give him a lien on the property behind our first lien in the form of a deed of trust or 2nd mortgage.

We had a hard money loan in a first position on that property, and her uncle was going to loan that $30,000 in a second position behind us on that property, in exchange for a flat fee of $2,850 for loaning Nicole that money for a term of 6 months.

And whether the house sells in two months, three months, six months, the uncle was still guaranteed to get that $2,850. And he was going to get a lien on the property. Sounds like a great deal for the uncle! Why? Because rather than him just wiring the money into Nicole’s account and hoping and praying that the deal was going to work out, he was going to make a loan to Nicole. He was going to get a guaranteed $2,850 in 6 months whether she kept the loan for 2 months or 6 months. And he was going to get a lien on the property.

But why not partner with her uncle? Rather than having to split her final profits with her uncle, and deal with the hassle of having him as a partner, Nicole made him a lender and got a gap loan from him instead. If Nicole’s final profit on the deal is $15,000 and she agrees to make her uncle and partner and give him 30% of her profit. That would be $4,500. That’s a lot more than a flat fee of $2,850. Nicole is much better off if she makes her uncle a gap lender than a partner because Nicole walks away with more money.

But there’s one thing that you definitely need to know before you go out and get gap lenders to lend you money. There are licensing requirements. Some states require any lender that is lending on a residential property, whether it’s owner-occupied or non owner-occupied, whether it’s investment or consumer, to have a license to lend their money.

So don’t go out soliciting money from people to lend on residential property in a state where they may need to be licensed unless you understand the lending laws in that state. Why? Because you could expose them to liability and possibly very stiff fines. And you don’t want to put them in that liability.

How do you solve that problem? Lend your money through a licensed broker, like us! We can arrange for that on your behalf.  You don’t have to worry about the licensing requirements because we are already licensed.

If you have any questions about how to structure this, leave him in the comments section below and we will answer those for you. Or reach out to us on our contact page. If you think that someone you know could benefit from reading this article, please share it with them!

Private Mortgage Lenders: What Realtors Need to Know

With private mortgage lenders, also commonly called a “bridge loan” you can save your deal!  You’ve worked hard to get this deal closed and you’re almost to the finish line when a buyers financing falls out. When a deal falls out, even if the realtor isn’t to blame, the realtor can feel somehow to blame. As a realtor, how can you help save a deal that you’ve worked so hard to get to the finish line?

How A Private Mortgage Lender Can Save The Day!

Here’s a recent story about a buyer’s financing that had fallen out at the last minute after the sellers had already moved out of the home. What a nightmare for Jonathan, the realtor who represented the seller!

He felt somehow responsible for the deal falling through, even though he had done everything in his power to make sure it would close and it was out of his control.

Jonathan did not know about private mortgage lender and how they are used to fund acquisitions like this in a situation where a buyer’s financing has fallen out. Jonathan called his mortgage broker friend for help, who then told him about us. Jonathan then gave our contact information to the buyer.

We were introduced to the buyer on a Tuesday and he proceeded to get approved for a loan with us that same day. Guess what? We funded the purchase on Friday, by the end of the day, and the interest rate was under 10%!

Yes, this is a true story. This is also a good example of how Jonathan, the seller’s agent, indirectly saved the deal by introducing the buyer to us. This buyer just needed to file his 2019 tax returns to qualify for a long-term, 30 year mortgage so we gave the buyer what is called a “temporary bridge loan.” This is a loan used for purchases, a loan that is for 12 months or less, and with an interest rate under 10%. But the best part about bridge loans? These loans can close in days, not weeks.

Why Realtors Need A Private Money Lender In Their Contacts
private mortgage lenders

Realtors that know how a private mortgage lenders are able to close more deals and close them faster than realtors who don’t know about private money loans. These private money loans help your clients purchase properties that they quickly refinance with a long term loan, on average within 2 to 4 months. That’s why these loans act more like a line of credit than a loan. And believe it or not, bridge loans most often do not go on your client’s credit report.

Despite popular belief, private money loans are not as high cost as many realtors think. Here’s an example. Say your client gets a private money loan at 9.5% and only keeps a loan for 2 months. He pays 1.58% in interest for the two months. What a small price to pay when you consider the high cost of losing that deal for all parties involved!

A private money loan is an easy solution that can save a deal that you may have worked on for months.

Get to know us as your go to private mortgage lenders for your fall outs, or even as a back up plan. Put our contact information into your phone right now, or forward it to someone you know that could use a fast loan for a fall out. Phone: 435-565-1768. Email: [email protected] We are licensed, very reputable, and have worked with a ton of realtors and their clients to solve problems like these. You’ll never know when you may need to reach out to us so please keep our contact information handy.

What questions do you have about how to use private money loans to solve real estate lending problems for your buyers and sellers? Leave your comments below and give us a chance to discuss it with you. You may be glad you did when the next problematic financing issue comes up that could compromise your real estate deal.

Protect Yourself From Hard Money Lending Scams (2019)

Look our for fake lenders so you don’t get ripped off!

Video Transcript
This is Corey Dutton, I’m a private money lender and today I’m going to talk to you about warning signs to look for to spot an online hard money loan scam. So what is the most common type of loan scam that you’re going to find online.

The upfront fee scam.
This is a scam whereby a lender is going to ask you for a fee in advance of giving you the loan. The most common name that this fee scam goes under is an application fee. Remember that the loan terms that these scam artists are offering you are often too good to be true.

It’s human nature to want to believe something that is often too good to be true.  That leads us as human beings to often ignore the warning signs don’t ignore the warning signs that I’m going to talk about here in this video.

The Story of Tom and Anita who lost $4,500!

I’m going to tell you a story about Tom and Anita.  Tom and Anita are first time real estate investors that were out there looking for a private money loan. Tom and Anita were recently taken by a loan scam to the tune of $4,500!

They found a fake online profile someone posing as Private lender Frank. OK. And they ended up giving this perpetrator $4,500! They lost it. Obviously it was a loan scam.

So what are some of the warning signs that Tom and Anita could have looked for in this online loan scam?

So what you want to do is you want to act like a private investigator when you are looking for private money loans. You need to turn into aP.I. private investigator. You need to really do your research and due diligence on these private money lenders that are offering you money especially if the terms seem too good to be true.

The first thing that you want to do is you analyze the online profile of this individual or company that is offering you a loan. Everyone has some kind of online presence in this day and age. OK.

What kind of things could Tom and Anita have been looking for in the online profile of this private lender Frank to avoid being taken by a loan scam?

I’m going to talk about some of them here. Take a look at this example. When you click on the profile of this person you’re going to see that often if you click on their connections or friends that they don’t have any connections or friends to show. The other thing that you want to look for is the contact info for this individual. Check out this example here.

This person has an e-mail address that is a looks like it has a typo in it. And the phone number is a what’s at phone number. OK that should be a huge clue to you that this person is probably not legitimate then what you want to do is you want to read the person’s posts that they put online and look at their e-mails that they’re sending you. OK. Look check out this post.

 

This is a good example of a loan scam that someone’s perpetuating and you can start to identify these people online by the way that the the the phrase these posts they all sound the same.

So start to get good at recognizing these scammers by what they’re posting online and then do they have a Web site. Check this Web site out here. This is a good example of a website that has a one page Web site. They’re gathering information from you. But if you look at this there is no contact information and there’s no other pages on the Web. If they don’t have a website it’s probably a scam.

If they do have a site and it looks like this example that I’ve just shown you it looks like a teenager may have put it together last night and then posted it on the web today. It’s probably a scam. OK. Legitimate lenders have usually have a Web site OK. And then finally the photos.

Private Lender Frank scammed Tom and Anita because he stole photos off of a LinkedIn profile of a real individual. He took a bunch of photos of this person and then he created or she created a fake profile on Facebook using these photos these people are super super clever. OK. They’re taking a bunch of photos off of a real person’s profile to make it look like this person is a real person.

Know what to look for and what you can do is you can do a reverse image look up on some of these photos. Download the photos and then go to one of these image tools online. It’s called reverse image search. Look up and see if you can find this person’s photos somewhere else.

Search online to determine if they’ve stolen the photos from someone and then match it with a different name. Are you able to find this person online anywhere other than this particular Web site where you’ve found this individual. OK for example do they have a LinkedIn account? Many don’t!

Do they have a Web site?

Can you find any other information about this person online when you’re searching other than just the information that you’re finding in that one particular site. If you can’t find this individual anywhere else online or any reviews or any other information about them to do to make it to confirm that they’re actually a real person. It’s probably a scam.

How do the terms that you’ve been offered from this lender compare with the terms that you’ve got from other private moneylenders.

Tom and Anita, let’s go back to the story of them again. They were receiving terms from various private money lenders on a deal that they were looking to get funding on and that all the lenders were asking for money down and they were offering them an interest rate of 12 to 14 percent.

This private lender Frank he was asking for no money down and he was offering them an interest rate of 6 percent.

So how do the terms compare between the other lenders that you’ve talked to and this particular lender that may be a scam was offering terms that seem too good to be true.

And then finally the requirements. What are the requirements for approval?

• If there are no requirements or if you’ve been declined by multiple lenders and then all of a sudden this private money lender is popping up and they’re giving you an immediate approval.

• They’re not asking you the right questions.

• They’re not gathering the right information from you.

It’s probably a scam. You’re ready to send in money. Now how are you sending the money? And who are you sending it to?. If you’re sending them money via Western Union, via Venmo, or via zoom this is probably a scam.

It’s one thing that could have prevented Tom and Anita from getting taken by this Private Lender Frank was he gave them wiring instructions to wire him this $4,500 dollars.

But if you looked at the wire instructions the account holder name was a woman’s name. A woman that they had never heard of. That should have been the warning sign right there to say wait this isn’t right.

So does the account holder’s name on the wire instructions match the name of the individual that you’re dealing with or the company that you’re dealing with?  If it doesn’t, it’s probably a scam.

Hard money lender references

And finally references, don’t rely too much on references if you ask for references and the lender gets defensive and says that they want to protect the identity of their clients.

It’s probably a scam but if they give you references take those references with a grain of salt because these people are professional scam artists.

They’ve got scripted references ready to go. And most of you won’t be able to get a hold of and if you are you’ll only be able to get a hold of one which is pretty easy to to put up in as a scripted reference so again don’t rely too much on references.

Do you have questions about anything that I’ve said here?  Here the warning signs that we’ve talked about here. Leave your question in the comments section below and I will answer them as fast as I can.

Getting a Home Loan With Bad Credit

bad credit home loans

With new mortgage rules passed since the last recession, it has made it even harder to qualify for home loans for bad credit borrowers.

Private money loans are a good option for home loans for bad credit borrowers. A private money lender is simply defined as a non-bank lender.

If the term private money makes you nervous, think for a minute that the largest private money lender in the United States is ‘Quicken Loans,’ as of the date of this posting. But for bad credit borrowers, ‘Quicken Loans’ is not a good option as you must good credit and they have stringent guidelines.

A few reasons for bad credit could include, bankruptcy, unexpected medical bills, credit disputes, temporary job los, or even a difficult divorce.

Private money lenders provide alternative solutions for bad credit borrowers by offering sub prime loans, bridge loans, or portfolio loans, or a hard money loan.

Private money lenders that do make home loans for bad credit borrowers usually fall in one of the two categories:
1. Sub prime loans
2. Bridge loans.

Interest Rates

While these loans have slightly higher interest rates than FHA or conventional loans, they tend to be faster and come with less stringent requirements for loan approval. Because each borrower has different goals, it’s important to determine those goals before pursuing one loan over another.

For borrowers with the goal of having a long-term loan option, sub prime loans are a good alternative because these loans can be held for a term of up to 30 years, with both principal and interest payments.

In fact, the most common use of a sub prime loan is for home loans for bad credit borrowers who want to keep the loan for a long term, 5 years or more.

There are sub prime lenders that will lend to borrowers with credit scores as low as 500, even those who are only one week out of bankruptcy or foreclosure. The interest rates on these loans range from 6% to 9%.

Short Term Bridge Loans

For borrowers with the goal of purchasing a property quickly and refinancing or reselling in the short-term, in under 5 years, bridge loans are the best option because they are typically 2 years or less.

  1. To purchase a property and then sell or refinance with an FHA loan or conventional loan within 1-2 years.
  2.  Pay off revolving debt on credit report with the goal of raising the credit score of the borrower. Bridge loans are typically not credit based either, which means lenders don’t decline a borrower because of a low credit score. Because bridge loans are so short-term, they don’t appeal to borrowers who are looking for a long-term loan option. The interest rates on bridge loans are higher than sub prime loans, and range from 7% to 12%.

A borrower looking to purchase a property, or refinance a property, is quickly discovering that there aren’t a lot of options for home loans for bad credit borrowers.

Since the last recession, bank lending standards have grown more stringent and it is not easy to qualify for a mortgage loan.

Banks often look for reasons not to make loans, rather than focus on reasons why they should make loans.

Some people have bad credit, and well, bad things happen. So what are the alternatives to an FHA loan or a conventional loan?

When searching for home loans for bad credit, many people simply don’t know where to start. Hopefully this short article has helped explain how private money lenders are a good resource for bad credit borrowers.

Questions? Comments? Leave them in the comments section below. Did you find this post informative and helpful? Please share it with someone you know!

Hard Money Loans Explained. Hard Vs Private Money

Hi this is Corey Dutton, I’m a private money lender and today I’m going to talk to you about, “private money explained.” Some of the questions that I’m going to answer for you today are:

  • What is a private money loan or what is a private money lender?
  • How is a private money lender different from a hard money lender?
  • What are the typical interest rates that are associated with a private money loan?
  • And what are a few ways that private money loans are used?

So what is a private money loan?

A private money loan is any non bank loan. So any loan that comes to you from a non depository institution.

Now, many people have a misconception that private money loans and hard money loans are two different things.

What’s the difference between a private money lender and a hard money lender?

Absolutely nothing!! I see it all the time, I see these videos online where these people are like, “why use a private money lender over a hard money lender?”

Again folks, a private money loan is any loan that comes from a non bank source, ok. So a hard money loan is just another type of non bank loan.

But why is it called hard money instead of private money? What’s the difference between private money and hard money? Like I said before, absolutely nothing!

They’re both non bank loans from a non depository institution. But why does hard money have that name, “hard?” It’s because a hard money loan is any loan against a hard asset.

WhatAre Typical Hard Money Interest Rates

what is the typical interest rate that is associated with a private money loan or non bank loan? The interest rates that are typically associated with private money loans are going to be a lot higher than your typical bank loan.

Usually the rates are going to range from as low as say 8% to as high as 18%. Yes I’ve seen them that high before.

And then finally, what are a few ways that people use private money loans? Well, most typically in my business, private money loans are loans against real estate.

But private money loans could be loans against any type of asset, any type of hard asset such as a car, such as gold.

Ok, those are just a few examples of hard assets that can be liquidated fairly quickly for cash. So

Conclusion

Hopefully I explained to you a little more about what is private money and how is it different from hard money.

The answer, the simple answer to that question is: absolutely nothing! There’s no difference!

And what you will commonly hear, you’ll hear this from other people, they’ll say something to you like, “Well you should start with private money lenders first and then if you can’t get a loan from one of them go to a hard money lender.” Well that’s wrong!!

The reason that’s wrong is because a private money lender is NOT your family and friends, and then a hard money lender is like me, an organized company with a website. No, no, no, no, no! It’s all the same, we’re all private money lenders.

So hopefully you learned something from this and that thing is: There’s no difference between private money and hard money.

If you have any questions about anything that I’ve said here, please leave them in the comments section below and I’m happy to answer you. If you found this video useful, or you liked it, please like it or share it. Thanks for watching!

Are Hard Money Loans Safe?

Video Transcription

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!

Transcription

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

Video Transcript

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?

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.

Beware of Hard Money Lenders With Bank Like Requirements

Avoid hard money lenders with bank-like requirements and bank-like sluggishness. When you want a hard money loan, you’re thinking speed, less hassle, and asset-based lending.

Many hard money lenders have strict requirements like banks, and move as slow as a tortoise!

Why pay the higher interest rates associated with hard money loans if your lender acts just like your banker?

Forget about it! If you are working with a lender like this, find another hard money lender!

Watch the video and see why

Video Transcription

This is Corey Dutton, I’m a private money lender, and today I’m going to talk to you about hard money lenders that act like banks.

These are the type of hard money lenders that you just want to avoid! A hard money loan is called such because it’s an asset-based loan against a “hard asset,” and a hard asset is any asset that can be liquidated fairly quickly for cash.

So, you go out seeking a hard money loan and you expect 3 things: #1, You Expect Speed, #2, You Expect Low Documentation Requirements, and #3, You Expect a Loan that’s an “Asset-based” loan, e.g. the real estate.

So what I’m trying to tell you today, the lesson learned from this video is, look out for hard money lenders with requirements like a bank and tortoise-like slowness in closing your loan!

Requirements For A Hard Money Loan

The first thing you want to look at is their “list of requirements.” What are they? Are they a mile long, or are they really small, something that you can say, “this is great! This is kind of what I’m expecting” Beware of heavy documentation requirements.

Appraisals

The second red flag to look out for is a lender, a hard money lender, that’s looking for an appraisal. Now an appraisal isn’t necessarily a bad thing, but if you need to close your loan quickly, an appraisal could delay you by several weeks.

Find out how your Hard Money Lender is planning on valuing your property. Are they using an appraisal? And if they, are what is the cost and the turnaround time to get that appraisal back?

If you have to close next week, the likelihood of you fulfilling that requirement of getting that appraisal with the lender in time for your closing? Probably not going to happen.

The Lender Keeps Asking For More

And then the third thing that I want you to look out for is a lender that is scrutinizing every aspect of the loan, but really not paying attention too much to the asset.

A good example of this is a lender that just keeps coming back to you for one more documentation requirement after another.

Another example is a hard money lender that has unreasonable requirements. You know we talked about low documentation requirements, we talked about speed, we talked about something “hassle-free” something “asset-based,” right?

There’s a lot of hard money lenders out there that are online, that are fairly well-known, that you’re going to go to for a hard money loan and you’re going to find out that they are underwriting your loan exactly like a bank and their speed of funding is as slow as a banks’.

So what do you do when that happens? Find another hard money lender folks, don’t spend too much time, don’t waste too much time, with a hard money lender that’s not a true asset-based lender.

That’s the lesson learned here! Find a hard money lender that’s a true asset-based lender, that has low documentation requirements, that has a high speed of funding, and looks at the asset as the primary means of approving or denying your loan.

This is Corey Dutton, I’m a private money lender, and if you like this video please like it. If you have any questions, leave them in the comments section below.

7 Hard Money Tips That Will Keep You Out of Trouble

Video Transcription

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.