Hard money, or private money, is usually not for the faint hearted.Although it has other uses, in real estate, it is often used to buy or fix a property, so that a more conventional loan can later be used, or the property can be put on the market for sale.
This product is usually available through a private investor, or investor group, and has many advantages. It is most often asset based, which means the value of the property is the overriding consideration. the lending is usually based on an "after repair value' (APV), so you may be able to get 70% APV. This doesn't sound that good, but if you buy for $100,000, and add $20,000 in repairs, to achieve a $150,000 sales price, then technically you could borrow $105,000. You normally can't do that, since the lender wants you to have " skin in the game", typically 5-10 %, and you need money for repairs. So, a more typical scenario would be borrowing $90,000, having 5-10% down, and 5-10% seller carryback. Always make sure money is there for repairs.
Additionally, you can usually have interest accumulate until you sell or refinance.You pay 1-3 points up front(sometimes cash,occasionally financed,but often just deducted from the amount lent). Interest is often in the 12-20% range, and the term is mostly 6-9 months, but it can be longer.
Credit is usually not even considered, although in this market, things are changing, and people may look at your report. They will also want to know if you can "fix' a property, so that your track record can be part of the procedure.
Your hard money lender will probably be from your area. He will want to be able to look at the property to see progress.He will take a first position, so that he can quickly foreclose, if needed. In the more robust markets, many felt that the hard money lender was hoping for a default, so that he could take over the property, finish it up, and make an even better profit than you would have.
This is the key point. Don't let your hard money lender foreclose on you. Buy right. Make sure you have time to make repairs and sell quickly.Do not price too high. Make sure you choose a neighborhood that sels well, even in a down market (usually low to medium price, good location, good schools). If you are planning on keeping the property, have your onward financing lined up. Make sure you don't have prepayment penalties. and make sure the lender will work with you for an extra period of time, if you run out.There will be a premium to be paid, but it may be the best prearrangement you could make.
If you pay attention, and don't waste time, then this can be a great way to build wealth; if you goof off, get greedy, or don't get your ducks in a row, you could be heading for a world of hurt.
Comments(0)