BUSINESS FUNDAMENTALS
HARD MONEY LOANS
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Hard Money Loans
A LOOK AT THIS EFFECTIVE FINANCING TOOL.
A
Hard Money Loan (HML) is an effective financing tool for many real estate investors. Many investors have heard of these loans but may not understand their benefits or proper use. When most people hear the term HML they be- lieve it is only for people with poor credit. Others that have heard of HML but not used them are afraid of the high rate of interest or the fear of getting “stuck” in the loan. These concerns are greatly reduced with understanding and proper use. The original definition of HML was a loan for borrowers that did not qualify for a more traditional loan so the lenders would make the loan based on the “Hard Equity” in the proper- ty. This definition has transformed in today’s lending environment as a valuable tool for qualified borrowers to take advantage of maximized lever- age for discounted properties. The deeper the discount, the better the leverage advantage of an HML. Hard Money Loans are up to 100 percent Loan to Cost (LTC) not to exceed 70-75% of the After Re- paired Value (ARV). Rates typically range from 12-14 percent and include fees from 2-3 points. This equals 100 percent LTC for acquisition plus repairs! Closing costs on this example equal $5,000.
An example of a HML:
Sales Price: $ 60,000 ARV: $ 100,000
Repairs needed: $ 15,000 Closing costs: $ 5,000
Amount needed:
Amount financed:
Sales Price: $ 60,000 Repairs: $ 15,000
ARV:
$ 100,000
X:
.75% (max loan amount)
$ 75,000
$ 75,000
One of the main reasons for the use of the HML is the maximized leverage — the ability to control a large asset as well as the need- ed repair/construction money with minimal cash out of pocket. Another advantage of HML is the simplistic documentation and fast- er closing timelines compared to other investor loans. Basic documentation includes: Sales contract, Repairs list, Appraisal (subject to repairs), Title commitment, Insurance coverage, Survey (if needed). Because of the simpler documentation, these loans can close in two weeks or less! At closing, the repair money is es- crowed by the lender and released through a construction draw process. As repairs are completed, the money is released after inspection.
Draws are released on “complet- ed work only.” No monies will be advanced for down payments to contractors or to buy materials. The inspector will use the repair list used in the appraisal. For ex- ample, If the borrower used $4,000 for the repair list submitted and actually they spent $5,500, then only the $4,000 would be released. Conversely, if they get it repaired for $3,500 then the draw could be for the amount set aside of $4,000. These loans work extremely well for flippers or buy-and-hold inves- tors as the front of a “double close,” with the refinance of a conventional, portfolio, or securitized loan. •
Blake Yarborough is the President of Investor Lending and you can learn more at investorlending.com or by calling 713-337-2000.
40 | think realty magazine :: september / october 2019
thinkrealty . com | 41
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