When I started out in my real estate career as a residential real estate agent, I helped buyers purchase their first home and existing home owners sell their properties. I learned as much about the business as I could including making sure my buyer clients were pre-qualified with a reputable lender and that they had enough funds for the down payment and closing costs.

My First Real Estate Investor Client

The year was 2010 and interest rates were at historical lows along with home values. As I closed more real estate transactions, I started getting more referrals and eventually was introduced to my first real estate investor client. This client was a house flipper meaning they would purchase a property at a discount, rehabilitate it and then sell the home for a profit. As intimidated as I was, I jumped at the opportunity to learn the house flipping game and became really good at identifying opportunities, writing offers and negotiating these deals on my client’s behalf. This wasn’t as easy as it sounds and a majority of the offers were “low ball” offers meaning the listing agents were not amused and didn’t even respond.

One of the things that caught my attention was that the “pre-qual” letter wasn’t from a traditional lender and the interest rate was really high (12%). I thought this was crazy and even asked my client why they weren’t using another lender with better rates?

I then heard the term, “ Hard Money Lender.” As visions of Joe Pesci breaking knee caps went through my head, I couldn’t help but ask my client if they were concerned?

Not Joe Pesci

They told me not to worry and then explained that the lender was a well known real estate investor who was popular among the house flipping community. They then went on to tell me that no traditional lender would finance their Fix and Flip transactions and even if they would, they certainly couldn’t fund the loan in 10 days which was the length of a lot of the escrows. I became intrigued and wanted to learn more.

Hard Money Lenders come in all shapes and sizes. The most common type is an individual trust deed investor such as your rich uncle but there are also more sophisticated lenders backed by Private Equity funds and even FinTech companies backed by crowdfunding.

There are pros and cons to the various business models but what is most important, is finding a reputable lender who understands the specific deal you are bringing to the table, can make a quick underwriting decision and can fund in a timely manner.

Why Hard Money?

Hard Money has its place in the real estate investment world but should only be used as a last resort. If you are unable to qualify for a traditional loan or the property, due to its condition, is not able to qualify then Hard Money is a suitable alternative. If you are looking to flip a home, purchase a non-stabilized income property or develop a piece of land then most lenders will be unable to finance the transaction. If you are competing against other investors who are paying all cash, then you might have a hard time getting your offer accepted with traditional financing and a longer escrow. This is where hard money comes into play as most lenders should be able to finance your purchase in 10 days or less and allow you to write an offer that is similar to an “all cash” offer.

How Do I Get a Hard Money Loan?

As with any type of loan there is an application process. Most hard money lenders will gather all of the usual suspects including a 1003 (loan application), credit report, 1 month bank statement and 1 year tax return. What is more important is the property you are looking to purchase along with the exit strategy. Hard Money Loans are intended to be short term which is why the interest rate is generally higher. A reputable lender is going to assess the property you are purchasing and then identify how you are going to pay back the interest only payment along with the principal at the end of the term. If you are flipping a home they will usually make sure you are purchasing the property at a discount, have a solid rehab plan/budget and that the market will allow you to sell the property in the future for a profit. If you are purchasing an non-stabilized income property such as an 8 unit apartment building with no tenants, they will assess you or your property manager’s ability to get the property leased up in a timely manner and refinanced with a commercial real estate loan. If you are looking to develop a piece of land, the lender will assess your experience and ability to entitle the land and get the necessary permits and approvals to complete your project.

What is a typical Hard Money Scenario?

There are numerous Hard Money Lenders in the marketplace, each with their own lending guidelines and products but for purposes of this article, I will keep it simple. In my experience, most lenders are willing to lend anywhere between 60% to 70% LTV (loan to value) of the purchase price or appraised value for a refinance. The term of the loan ranges anywhere between 6, 12 or 18 months but this depends on the specific real estate deal and purpose of the loan. Rates range anywhere between 8% to 13% or more, but this also depends on the LTV, property and term of the loan. What is also important is the position of the loan. If the lender is in 2nd position behind an existing 1st, then the lender might charge a higher interest rate because they are at higher risk in the case of a default. If borrower is seeking a longer term such as 36 months and the LTV is lower (50%) the lender might be willing to give a lower rate but will enforce a pre-payment penalty. Payments are generally Interest Only with a balloon payment due at the end of the term. Keep in mind, every lender has different underwriting guidelines so it is best to become familiar with multiple lenders. This allows you to find one that meets your real estate investment goals. The lender with the lower rate might have stricter underwriting guidelines, ask for multiple years of tax returns, etc. and take longer to fund. The lender that doesn’t require any documentation might charge a higher than average interest rate and could intentionally put you in a position where you can’t repay the loan allowing them to foreclose on your property. This isn’t necessarily illegal but not always the best way to win repeat clients. The majority of Hard Money Lenders will only loan against Non-Owner Occupied Properties meaning you can use a Hard Money Loan to purchase your Primary Residence.

Will you break my knee caps if I can’t repay the loan?

Although, breaking one’s knee caps is an effective way to instill fear, it is really bad for business. Today’s Hard Money Lender wears the same suit and tie as your local Loan Officer and is bound by state specific lending laws. As a Hard Money Lender I have a fiduciary obligation to my Investors and I have an ethical responsibility to loan on deals that make good business sense. This means I want to protect my investors money by loaning against good collateral at a comfortable LTV to borrowers that can show an ability to repay the interest with a sound exit strategy. If I determine the borrower can’t afford the loan or the exit strategy doesn’t make sense, then I simply won’t do the deal. If you are utilizing Hard Money, make sure you are comfortable with the payments, have a solid business plan and are confident with your exit strategy. Hire a trusted contractor for your rehab or construction project; make sure you have an experienced property manager. These people are worth their weight in Gold. Most importantly, find a Hard Money lender who has your best interest at hand and can also close the deal. A Hard Money Lender should be viewed as a strategic partner who can help you or your clients when they need short term financing for their real estate investment deals.

About the Author

Brendan Maun is the CEO and Broker of Maun Capital, A California based Direct Hard Money Lender. Brendan is also the CEO and Broker of TMG Home Loans and TMG Realty. For more information regarding a hard money loan for your next real estate investement purchase or investing in Trust Deeds, contact Brendan at: 949–229–3540 or bmaun@maungroup.com

www.mauncapital.com

www.tmghomeloans.com

www.tmgrealty.net

CA BRE: 01883063 | NMLS: 1006768

Why Your Hard Money Real Estate Lender Isn’t Ripping You Off (And Won’t Break Your Legs) was originally published in The Commercial Real Estate Daily on Medium, where people are continuing the conversation by highlighting and responding to this story.