Top Hard Money Loan Tips

Eureka! You’ve found a golden real estate deal. But what happens if your bank doesn’t finance the amount needed to insure the property, or doesn’t do so in the short amount of time needed? Do you cry yourself to sleep or are you looking for alternative options?

One of those options is a hard money loan. This is an asset-backed loan where the borrower receives guaranteed funds for the value of a parcel of real estate. In situations where money is needed quickly, going this route can be very successful. However, before you rush off, blueprints in hand, to your local hard money lender, there are a few key factors to consider.

cost

The rate that hard money lenders charge is usually much higher than that of banks, which is understandable given the short response time and more flexible lending criteria: the credit profile of the borrower is not as important as the loan. it is based on the value of the property that is put up as collateral. The rate does not depend on the Bank Rate. Rather, it depends more on the housing market and the availability of hard money credit. Available figures for the latest year give a range of hard money rates from the mid 12% to 21% (points are often charged upfront). In situations where the borrower is unable to meet payments, a higher “default rate” may be charged. . While it is to be expected that the fee you will be charged will be relatively high, it is also wise to ensure that this fee falls somewhere within the normal market standard range.

Amount

One should be aware that the amount of funds being lent is typically, on a loan-to-value basis, less than the bank loan-to-value ratio. The usual ratios are around 60% LTV. This relatively low ratio provides additional security for the lender so that he can foreclose on the property in the event of default by the borrower.

It is also important to note that this LTV is calculated on the current value of the property rather than a future value. This is the amount a lender could expect to earn from a quick sale of the property in the event of a loan default. Current market values ​​can differ greatly from market value appraisals that assume a sale that neither buyer nor seller is in a hurry to close.

Rate

Hard money loans are often criticized for their fee structure, which commonly charges up-front fees to work on the loan proposal. The concerns come primarily from those loan companies in the industry that accept advance payments to research loans and refuse to lend on virtually all properties while maintaining this fee. While it’s usually a virtue of hard money loans that can’t be shied away, borrowers must consider both the amount of fees charged and the company’s track record to meet their initial loan estimates.

Moment

These types of loans can often be closed within 30 to 45 business days if the loan is already in process with a bank. This quick time frame can provide a lot of flexibility for sponsors. The use of hard money loans can allow sponsors to tie up and close deals quickly, often providing the opportunity to negotiate favorable “all cash, fast close” rates with pressured sellers or banks.

conclusion

For many borrowers, the only alternative source of financing is to bring in a new equity partner and give away an ownership percentage in the property or business. As a result, before agreeing to work with a hard money lender, sponsors often ask themselves:

“Is it worth it for us to lease the capital for one, two or three years to achieve our business goals or should we bring in a new equity partner and permanently give away a piece of our real estate or business?”

The answer is, inevitably, a very simple ROI analysis that shows that in the long run, if there is a large component of capital growth in the project, the cost of borrowing hard money is much less expensive than sharing the expected growth of EBITDA in the next two years. to three years with partners. On the other hand, having lived through a downturn in the market in recent years, sponsors must be very confident that their business plans will play out as expected so that sales or refinancing events are held to replace expensive ones. hard money loans . Many developers had to hand over the keys to their hard money lenders because their market expectations did not play out as expected. Caveat emptor: buyer beware.