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1. What is "hard money"? Answer
2. Why would I want to use a hard money lender? Answer
3.  What are the types of hard money lenders? Answer
4.  What are the terms and conditions for hard money loans? Answer
5.  What do your hard money lenders look for in a borrower? Answer
6.  So do I need a hard money "equity" lender or a hard money "private" lender? Answer
7.  How do I pick the best private lender? Answer

Q : What is "hard money"?
A :  

The term "hard money" in general refers to money provided by (1) a private person using his/her own funds or (2) an institutional lender who specializes in equity loans.  Lending criteria can be quite diverse.  At one end of the spectrum is the "hard equity" lender who bases the lending decision exclusively on the real estate.  The other extreme is the "relationship" lender who makes a decision based on the borrower's credentials (such as experience, credit rating, income, stability, working capital, etc.) and places less emphasis on the real estate.   Our private lenders are a unique blend of both.

Q : Why would I want to use a hard money lender?
A :  

At some point in your real estate investing career you may need a hard money lender.  It may be that you have to close quickly to take advantage of a lucrative situation.  Or maybe your usual institutional lender is unwilling to fund the "fixer upper" you want to buy because it is in such bad condition.  Or, if you've been using your own funds, you're starting to realize that keeping your money tied up limits the number of deals you can work simultaneously.  Whatever the reason, it's a good idea to have a relationship with a hard money lender who can pull out all stops to help you close money-making deals.

Q :  What are the types of hard money lenders?
A :  

Institutional lenders tend to be "equity" lenders and may require appraisals, surveys, pest inspections, endorsements, and other costly items. This type lender typically loans 65-75% of the appraised value and charges 2-5% of the loan (points) and sometimes other miscellaneous fees.  The lending criteria are usually fixed and the borrower does not negotiate directly with the money source or the "decision maker."  This type lender frequently uses mortgage brokers to find borrowers.  They usually have unlimited funds.

Private lenders may be equity lenders or relationship lenders.  Since they are working with their own funds, they determine their own lending criteria and may make exceptions depending on their experience with the borrower.  The private lender can be extremely flexible and can move rapidly to close a loan.  Private lenders can include relatives, friends, neighbors; but they usually have limited funds.  The best private lenders are found by word of mouth.  

Q :  What are the terms and conditions for hard money loans?
A :  

Hard money lending criteria can be anything the lender feels comfortable originating with a particular borrower.  Generally, institutional loans are lower interest (12-14%) and higher closing costs (2-5 points, appraisal, survey, plus additional fees) while private money is higher interest (14-16%) and lower closing costs (1-2 points, no appraisal, survey, or junk fees).

In addition to higher closing costs, the institutional lender will require more documentation on the property, usually an appraisal, and the loan amount will be based on a pre-determined loan-to-value ratio.  Many institutional lenders will also charge a prepayment penalty if the loan is paid off prematurely.  The payments may be interest only or fully amortizing up to 15 years.  Some lenders may escrow funds for repairs.

Private lending criteria is best described as "anything goes."  Each lender has his or her own lending criteria.  Flexibility is a real advantage in dealing with a private lender.  It's their money; they make the rules.  And with time, the lending is based more and more on a personal relationship with the borrower.  Some private lenders will do 100% of the purchase price.  Others will require a loan-to-value ratio based on current value or rehabbed value.  Sometimes a prepayment penalty will be charged.  Costs will range from nothing up to 5 points.  Usually the term will be interest only up to 60 months.

Q :  What do your hard money lenders look for in a borrower?
A :  

Requirements for the borrower vary from lender to lender.  The "equity" lender usually focuses less on borrower strength and more on the property compared to the "relationship" lender.  This lender usually requires an appraisal and sometimes a survey and pest inspection.  Thus, the emphasis is on the property, not the borrower.

The private relationship lenders screen the borrowers carefully and, to a lesser degree, the property.  Our lenders are looking for top notch borrowers who buy good properties with the intention of fixing them in order to resale as soon as possible.  They are looking for mature, stable people with ties to the area, a source of working capital, good credit, income, and experience or training in courses such as those offered by your local real estate investment club.

Q :  So do I need a hard money "equity" lender or a hard money "private" lender?
A :  

Don't make the mistake of assuming that the lowest interest rate is the best deal.  Do the math.  If you are going to keep the property longer than six months, it may be better to go with a lower-rate institutional lender and pay the points up front.  For short term real estate ownership (just long enough to wholesale or rehab the property), the private lender is probably best.  The higher interest rate is more than offset by the lower costs and the quick response.

Q :  How do I pick the best private lender?
A :  

Many private lenders have limited access to funds and it is not unusual for them to occasionally turn down lending opportunities because of lack of funds.  Some are professionals who have full time jobs.  Or they may be retirees who take frequent vacations and are not available at a moment's notice to take care of your borrowing requirements or to quote a payoff.  This can result in delayed transactions which can mean reduced profits.  Some are also real estate investors and have been known to steal deals from their borrowers, while others make it a policy not to compete with their borrowers.

As a borrower, it is to your advantage to build a relationship with a private lender.  You should research the costs, terms, conditions of the loan and determine the reliability of the lender.  You want to make sure you have a lender that you can count on to support your bid activities and not let you down at the last minute.  Poor performance on the part of your lender could result in a loss of your deposit and/or failure to close on a lucrative property.

A number of private lenders can be considered "professional" in that they are full time with backup personnel and have extensive experience in dealing with real estate attorneys, title companies, real estate agents, and, of course, borrowers.  They prepare their own documents and attend all closings.  Our private lenders can represent your interests at the closing table and point out errors or unnecessary charges that may appear on the closing statement.


Providing funding solutions for real estates investors in the Central Florida area.