"Hard Money" makes sense for good credit borrowers

Mortgage and Lending with San Diego VA Home Loans/858-777-9751

Why would a borrower with a 736 FICO score get a hard money loan?

I'm deviating a bit from my earlier blog, So you want to be a California Hard Money Broker?  I know I promised more detailed information about  the disclosure process in California Hard Money transactions and I will.  Tonight, I'm not up to that arduous task.  I'll share with you some reasons why a borrower with GOOD credit would actually pay the high points and rates associated with a "hard money loan"

Introduction:  Private mortgages or "hard money" loans are all about taking on risk that is unacceptable to conventional lenders.  This loan is most commonly known for the "foreclosure bailout" but can be useful for an investor looking for a quick loan approval to take advantage of an extraordinary property. 

Small Apartment houses:  We often get requests from multi-family investors for a loan that allows a seller-carryback behind it.  Multi-family loan underwriting is driven by the income derived from the property. The traditional multi-family lenders are anal about this ratio called "debt service coverage".  Now we tend to understand that a property can go through a renaissance by some minor cosmetic improvements.  We know that the  improvements will result in higher rental income and subsequent higher values.  We are willing to accept a subordinated seller-carryback for an investor who wants to purchase a property with negative cash flow provided he has a detailed plan on how to improve the property and restore the DSCR through higher rental income.

Vacant Land:  Traditional vacant land lenders are wary of seller-carrybacks.  We are willing to lend up to a certain value on vacant land with a seller-carryback up to 100%. Our rational is that the market risk has been transferred to the seller with this type of loan transaction.  If we are comfortable owning that vacant land at the loan amount (usually 50% LTV), we'll make the loan.

Owner-Occupied Commercial:  Traditional commercial lenders won't lend on an owner-occupied commercial building for fear of the business risk associated with the borrower.  If we feel that the property has utility in other businesses, we'll throw a value on it and lend  up to 65% of that value.  Our thought-process is that  a business that paid rent in a similar amount to our debt service will be able to handle the load.  If we're incorrect, we have a property that is attractive to other businesses at a below market cost-basis.

Flippers or Foreclosure Buyers:  We generally dislike flippers because they'll be wrong one day and we don't want to be the lender on that one wrong transaction. However, we have found some borrowers with a really good eye for "the deal. "  Their experience in undervalued transactions is what gives them credibility with us.  They appreciate our ability to make a quick loan decision and fund quickly.  Sometimes, a low price can be negotiated by a buyer with the promise of a 7-day closing. 

Broken Construction:  Banks and traditional mortgage lenders HATE broken contsruction; we understand it.  Traditional companies believe that an owner-builder who runs out of money can't manage a construction budget.  We understand that the past two years have been difficult with higher materials' costs and labor costs.  We'll look at the end result (market price of the finished project) , control the funds needed to finish the project (via the draw/inspection method of disbursing funds), and lend the money.

Just a few ideas for hard money brokers on how to find potential borrowers for your niche loan product.  

Read: So You Want to Be a California Hard Money Broker? 

          Hard Money Equals Hard Headaches   for an originator's learning experience 

          What is Hard Money Lending?

          You're Building and You Ran Out of Money?

          What's Your Rate?

          I Guess I'm a Predatory Lender

          Did You Receive a Notice of Default?


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Jay Thompson
Zillow - Seattle, WA

We do a lot of land transactions. 'Splain to me why it's so hard to find lenders that will do vacant land loans? Is it because vacant land tend to be less liquid than a single-family home?


A world record for blog commenting!



Dec 13, 2006 05:50 PM #3
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time
Excellent stuff Brian. I have bookmarked this with your other posts for reference. BTW do you do hard money loans in Florida?
Dec 14, 2006 12:22 AM #4
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA

Bryant:  I do hard money loans in Fla but I only have 3 investors there.  I tend to rely on the mortgage pools (see second paragraph of this article) So the answer is yes but I really don't have a price advantage over a local mortgage broker.  It looks like I need to develop a practice there beacuse there is a need for hard money. 

Jay:  You hit the nail on the head with the liquidity of vacant land.  I will loan 50% of the purchase price in AZ but we tear apart the value.  Will a buildable lot in PV pass muster?   Of course.  I'll lend on a lot in Paradise Valley up tp 70%; that's liquid.  I'll get nervous when it's a 40 acre tract in Buckeye.  Not that there is anything wrong with Buckeye but prices rose quickly and a "new market" is more suscpetible to wild ass price swings.  Does that explain it? 

Dec 14, 2006 02:14 AM #5
Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO
Brian excellent as alway. We have a builder, local group not one of the big guys, who experienced a fire and even though their other complexes are good quality and affordable, now they are in trouble. Broken construction as you say. I feel bad for them. It can take quite a while to get someone else involved once the first builder can't complete the project too. Sounds really complicated.
Dec 14, 2006 02:57 AM #6
Jason Price
Mortgage Financial Group, Inc - Eustis, FL
Brian, I know that you said you do not really do these in Florida, but I have a scenario that I want you to look at.  I will shoot you an email.  Thanks for mentioning this post today.
Dec 14, 2006 05:30 AM #7
Suzanne Marriott
Keller Williams Arizona Realty - Anthem, AZ
Associate Broker, CLHMS, e-PRO
Hard money?  Is there such a thing as "Next to Impossible Money"?  Not including Mr. X in the alley with the huge cash only interest rates!
Dec 14, 2006 11:12 AM #8
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Brian.... some good information here.  Especially in regards to the Owner-Occupied Commercial loans and the broken construction loans. There really aren't any true lenders that can do this, hence the reason why you need a hard money lender or person to do this for you.

You talk about the land loans, that allow a carry back by the seller up to 100%, but the buyer needs 50% down though. I have a few 75% to 80% with 10% to 20% carry back.... basically having the client put 10% down...   sure, your client doesn't have to put any money down.  But how many sellers are willing to hold 50% of the land?  I am sure you have done these, but if I were selling land, I wouldn't want to hold onto anything. And at least trying to make money on it and not break even. Just some food for thought.

My biggest question is in regards to your small apartment houses. You talk about seller carry backs and that many lenders are anal about the DSR, debt service ratios. But you don't mention at what LTV's or CLTV's that this can be possible at. Which kind of leaves someone as myself in limbo, not knowing what still can be done. Sure, it's a great way to get people to call you or ask you, as I am doing now.

Last... there was one sub-heading of foreclosure buyers. But you didn't really say anything about this. Is the last sentence in that paragraph in regards to this heading of foreclosure buyers?  Just trying to learn some more here.

All in all.... some good information here. Thanks for sharing. 

Dec 14, 2006 02:08 PM #9
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA

Jeff:   I'm not discussing foreclosure bailouts on this blog.  I lump the foreclosure buyers in with the flippers.   LTV:  50 on land, 70 on all else.  CLTV up to 100 on both if they can convice the sellers to carry.  Land buyers here in Cali expect to carry a bit as they try to accomodate a sale.  Multi-family deals don't cash flow with the seller carry?  Don't care, as long as my investors' first is protected by the bash flow.  The only fidiciary responsibility I have is to the investor (lender) , the borrower and seller can take the risky piece.  If they're wrong, my investor (lender) will own the property at a good price. 

Suzanne:  I'm thinking of changing the term to "easy money" but the SEO gods wouldn't pickup on it. 

Jason:  Great chat with you today.  Please get into this business.  I need better contacts in Fla and you're perfect for this business. 

Carole:  Broken construction is very complicated.  We loan that money with a belt and suspenders on it...that way we aren't caught with our pants down. I'll make one comment...there's an old saying..."Don't feel too bad for a millionaire"  I'm sure they'll figure out a new loan.  I'm feeling up to the task...should I call them?


Dec 14, 2006 05:20 PM #10
Jim Quinn
Quinn Appraisals - Bridgeton, NJ

Brian...  I didn't ask you to disuss foreclsures or bailouts. All I was trying to say is that you had it listed, but with no information.

In regards to the investor or yourself not worried about what the client or seller does... or that you don't have fidiciary responsibility....  I am not talking about that. Everyone throws this word, 'fidiciary' around like it's gold, but that you aren't worried about it. But then the lenders say, we look after our clients.  Which is it..?  You might say you as a lender that you doen't have this responsibility, do you care about the client? 

This is not direct at you...  but I think many people on here are throwing these words around and at the same time, saying that they are here to help the client. But then you come back and say, I am protecting the company and or lender.

Me?  I am doing both and you can do both. I make sure I don't commit fraud, that I give my company a sellable loan, and that I give my client a very good deal. The only reason I am bringing this up is because you brought fidiciary respnsiblity into it. All I was talking about was what you had mentioned in your blog and just trying to get a better on idea on some of the topics that seemed vague to me.

Maybe it just comes down to the fact that the West Coast is that much different than how we handle business here on the East Coast.????

Dec 15, 2006 05:01 AM #11
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA


I hadn't noticed an earlier comment from you.  As an appraiser you understand that the lender is your client and as such, you have no "responsibilities" to a borrower other than being polite and courteous.

I am interested on your thoughts about how the mortgage business might "do both" .   Are you a licensed appraiser in the state of New Jersey?

Dec 15, 2006 09:12 AM #12
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
Jim?  Jim?
Dec 16, 2006 07:20 AM #13
William Collins
ERA Queen City Realty - Scotch Plains, NJ
Property and Asset Management


Thanks for the post. I had an investor with a 760 FICO come to me with a hard money loan for investment properties. Your article has helped to enlighten me. I'll bookmark for reference.

By the way I got your postcard today. This article helped to enhance the value of your contact information.

Dec 18, 2006 12:22 PM #14
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
Thanks for the comment, William.  These loans have their place.  I look forward to talking with you
Dec 18, 2006 04:50 PM #15
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer
Thanks for the great post Brian! 
Dec 19, 2006 11:15 PM #16
Ann Guy
NA - Allentown, PA
Thanks for taking the time to explain that not all loans are conforming, even if your credit is good.
Dec 26, 2006 01:05 AM #17

I am seeking a hard equity loan on several vacant florida lots. I would like to put them all under one loan (umbrella) is this possible and what are the terms? The value of my lots are approximately $300,000 USD for 7 lots in different cities throughout the state of Florida.

Contact me via shall1432@aol.com

Aug 15, 2007 04:43 PM #18
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing

Will hard money go higher LTV with good credit for investment properties as you mention above or is the rule still 70%.  Meaning that the buyer still needs to come up with 30%.  Is that where the owner carry back comes from.

Don't mean to sound dumb, but I'm trying to learn here -lol!

Aug 16, 2007 04:38 AM #19
Shari Posey
Berkshire Hathaway HSCP - Long Beach, CA
What would the LTV be on a owner-occupied with great credit? I've got what seems like a "next to impossible loan" that needs to get done FAST.
Oct 01, 2007 03:06 PM #20
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Brian, I realize that this post is almost a year old but I wasn't on AR then. I am going to look for the rest of your posts on Hard Money. You have a very interesting approach to it.

But what about your remarks to me that your investors are very conservative? It seems otherwise.

Bill Roberts

Oct 09, 2007 04:55 AM #21
Paul Gapski
Berkshire Hathaway / Prudential Ca Realty - El Cajon, CA
619-504-8999,#1 Resource SD Relo

wow great blog i learned a lot from it.

Jul 14, 2012 11:25 AM #22
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