Hard money loans can be extremely useful. They are much faster to get, require little in the way of documents, and can be given on properties in any condition. However, like in any industry, you need to be aware of the various pitfalls.
This post will address what you should watch for when taking out a hard money loan.
First, let’s talk about advance rates. Right now, the market advance rate on purchase price is 75-80%.
However, sometimes — often in advertisements — we see numbers as high as 85% or 90% quoted. This is a good time to note that the advance rates that are often advertised are not what you get with many lenders, particularly the national ones. If you ever see a 90% advance rate shown in an ad or as a google search result, please be very wary of it. In particular, high advance rates can apply only in the following situations:
- Only be reserved for experienced flippers, with extensive real estate history (10+ flips)
- Exceptionally high FICO score borrowers (think 750+)
- Very low loan to ARV ratio (under 60%)
It’s also important to note that sometimes the 85-90% “advance rate” refers to the total loan (purchase price and rehab funds), and not the purchase price alone. Since it is customary to lend 100% on rehab funds, the actual advance rate on the purchase works out to be much lower. Consider the following example:
- Purchase price is $100k
- Rehab is $100k
- Total loan is $200k
As mentioned, you may see an advertisement for 90% of “LTC,” this means loan to cost, or 90% of total cost of $200k=$180k. This works out to the same, however, if you received 80% of purchase price and 100% of the rehab costs ($80k on purchase + $100k rehab = $180k), the exact same as the market standard advance rate.
Interest Rate and Points
Similar to the advance rate, the best interest rates are reserved for very experienced borrowers with high credit scores on properties that are already in good condition. In fact, many of these borrowers would be able to get conventional financing with a traditional bank if they had the time. Often, these are very busy flippers that need funding fast, and cannot focus on the paperwork banks require.
On the east coast, in New York, New Jersey, Connecticut, Massachusetts, or Florida, a complex project that involves significant rehab, or a mixed-used use or commercial property, almost never qualifies for the 7.99% rates that you might see in Facebook or Instagram ads. Instead, rates in the 10-11% range are to be expected. As you build a track record with your lender you may be able to improve your rates over time.
Now, let’s talk about upfront points. Almost all hard money lenders charge upfront points (the ones that don’t charge 15%+ rates), but if you are not working with a direct lender you may need to pay an extra point upfront to a broker. That’s not to say that working with a broker is a bad thing. Many brokers have extensive relationships with hard money lenders, and are able to separate the “BS” time wasters from legitimate offers. In other words, if you do not yet have a relationship with a dependable hard money lender in your area, a broker could be a good option. If you do have an existing relationship, or know of a good lender, save yourself the extra upfront fee and contact the lender directly.
It is important to deal with a hard money lender that you trust, and preferably one that understands the local market. The hard money loan business is complicated, and there are many documents that you sign when taking out a hard money loan. Some of the documents have provisions for technical defaults and nickel and diming of the borrower. The best lenders are those with which you can establish a personal relationship, understand the details of your project and timeline, and when appropriate can look past small technicalities which may not be working in your favor.
For example, if you work with a lender that does not have a sense of the local market and permits are pulled too slowly, they may panic and put the loan into default, claiming the borrower is not following the rehab schedule. Chances are, however, if you’re working with a local lender they have come across this situation many times before, and may be more flexible and understanding of the situation. We’ve had numerous situations where we refinanced local hard money loans originally made by other lenders, because the lenders simply didn’t have insight into the way the local municipality works.
This is one that’s hidden in plain sight. When evaluating a hard money loan, consider any administrative fees or processing fees that are being charged by the lender. These fees, often called “junk” fees are quite common in the industry and amount to thousands of dollars. There are also other, smaller, fees that you may be charged such as application or credit check fees.
In general, it’s wise to pick a lender a lender that does not charge these fees.
While it’s obviously great not to pay the extra fees, it’s also better to deal with a lender that uses straightforward pricing, so it’s easy to calculate your real carrying costs.
We seek to be the most trustworthy and transparent hard money lender in the United States. We’re 100% serious about that. When dealing with us, we can assure the following:
- No bait and switch on advance rates. You call us, we give you an advance rate on the spot, and we stick with it. We don’t “reconsider” or pull back from our offers.
- Lowest possible rate and points. We don’t offer single digit interest rates only to overcharge on junk fees. If we quote you 10%, it’s just that – never a dollar more.
- Easy to work with. We understand the markets we lend in and we know the issues involved in rehabbing or stabilizing the property. If you are our client and go over budget or are lagging behind the schedule, there’s no reason to worry. We’ve worked with many borrowers who have thanked and recommended us to other investors because of our flexibility and accommodating style.
- No games. We will never change the agreed upon terms days or hours before the closing date. We don’t conduct two week long underwriting process only to turn down the loan.
- Instant access to decision makers. No more waiting for lengthy underwriting approvals or rehab draws. When you partner with us, you’ll be in instant, constant, and direct contact with one of the decision-making partners freeing up your time to focus fully on the project at hand.