Hard money used to be synonymous with equity based lending. Equity based lending meant that the lender’s underwriting decision was influenced primarily on the value in the property and less on the borrower.
Today, all lenders are looking at all aspects of a financing proposal. Lenders now examine the property and the borrower. This includes hard money lenders.
Hard money lending is defined as short term higher interest rate financing that lends money to a prospective borrower to purchase and fix-up residential and/or commercial property. Hard money lending fills a need for fast financing to acquire and renovate properties that traditional banks can’t provide. To use an analogy, “once the ugly duckling is fixed up and ready for the prom” then the property is ready for permanent financing to a buyer or a refinance for rental purposes. You have to get from A to C through B! Hard money is “B” and is fastest way to buy a property that needs rehabbing.
Hard money is widely utilized by investors to facilitate their ability to get properties ready for permanent financing since permanent financing requires that a property be “fixed up” to be eligible.
The advantages:
- Usually faster than a bank. Most distressed deals require a short closing time. Underwriting decisions are usually made quicker than a bank’s decision.
- Generally less cash equity required than a traditional bank. This facilitates the property to become eligible for permanent financing.
- Usually more “common sense” underwriting.
- Specialization on the part of the lender.
How can hard money help you? Hard money can be the vehicle to allow you to take advantage of the real estate market today!
There are three facts of the real estate market today:
- There are better (cheaper) deals to be bought. Prices are down--in some areas a discount of 50% or more.
- You need to be a more qualified borrower than what was the norm a couple of years ago. Lenders expect higher FICO scores, income, and cash reserves. You should expect to supply full documentation to all lenders to include a fully filled out application, credit report (if you have), 2 years tax returns, and probably 3 months bank statements.
- The real estate market valuations will return to their previous highs and then continue to rise. They always do. Remember, money is made by buying when everyone is selling and selling when everyone else buying. Housing is a basic need and home ownership is as a part of the American dream. Projections that I have heard from numerous government and private sector sources forecast a 2-3 year window.
So, the opportunity is here and now to buy low and sell high!
A recent example of how the hard money financing process works for the borrower is Herb. Herb is a 33-year-old borrower that came to me through another investor that we recently assisted. Herb borrowed $113k to buy and fix-up a property here in Atlanta. He paid $78,000 for the property and escrowed $32,000 for repairs. He contributed $7,000 towards the deal. The property closed in three weeks and the after-repair-value appraisal came in at $168,000. Herb is almost finished with the rehab and is mulling a retail sale (yes, buyers are still out there). He is also considering renting and waiting for an even higher value in a few years. Either way he wins! He is ready for his next deal.
You can make money in real estate as sure now as a few years ago. If a property only returns to its previous value in 3-5 years and you bought it at 50% of its original value then you would double your money. The additional plus is that, if rented, the tenant pays the note and you would pay (a reduced) long term capital gains when you sell.
A mindset that some potential real estate investors have is that they are not sure that the market has bottomed. They want to “time” the market and buy at the absolute bottom. Let me tell you, you can’t. First of all, there is no date and time that this happens. Secondly, different areas experience different recovery rates. Third, when the media announces a turn around we will probably be well into it.
According to the National Bureau of Economic Research, stimulus plans are an accurate indicator of the bottom of a market. Note that the eight recessions we’ve had since 1948 have all ended just about the time legislation was enacted to counter the effects of the downturn. As you may be aware, President Bush signed the 2008 Economic Stimulus Plan. There is no substitute for due diligence and knowledge. The fact that you are subscribing to the Real Estate Arena reflects that you are a thoughtful and savvy investor. Digging for opportunity means taking the time to know the local market by visiting many potential purchases to gain a first hand insight into value. However, if you couple due diligence with knowledge, you are insuring your success.
I am a hard money broker that constantly looks for new sources of rehab financing. We have programs from three months to 25 years. My challenge is to keep up with the evolution (or revolution!) in the real estate market. Lenders come and lenders go and all go through belt tightening and belt loosening. While I utilize both national and local lenders in my home office location of Atlanta, Georgia, I (almost) exclusively deal with national lenders in all other states. The reason for using these national lenders is because of my familiarity and confidence in their ability to perform.
My name is Bob MacDonald of the MacDonald Group and I have 30+ years real estate experience. I look forward to helping you with your financing needs. We can do a prequalification if you desire to get ready to “pull the trigger”, but don’t have a specific property in mind. Call or e-mail for application and details. I can be reached at 404-454-6856 or bobmacdonald@mindspring.com.