Hard Money Lenders

Hard Money Lending Made EZ

By Thomas A. Rothstein

If someone would have had the credit conversation with me when I was graduating from high school then my life probably would have taken a different path. A good credit score is probably more important than your social security number. For some strange reason not having a social security number will not stop you from getting a new car, but a 550 FICO score would get you tossed off the car lot.

Your FICO score is not only important if you're trying to buy a new car, if you're trying to buy a house then you have an even harder up hill climb. At the moment I resurrected my credit score out of the 500's into the promised land of the 680's, the credit God's set the new FICO mark to 720. Trying to get a 700 FICO score can be a very elusive task being that it is not really clear how to accomplish this magic number.

So now I find myself in the world of real estate investing and to no surprise my 680 credit score is still not enough to get a deal done without a ton of money down. During the course of researching potential lenders I came across a term I had never heard of before, Hard Money Lender. At first I thought the mere fact that the word "Hard" was in the title probably means it would be totally impossible to obtain, but to my surprise this turned out to be one of the greatest oxy morons ever.

The term Hard Money only refers to the criteria the lenders uses in deciding the viability of the deal. In other words the "Hard Money" aspect is tied into the actual collateral or equity position of the deal. According to Wiki A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of real estate. Here is the best part about the world of Hard Money Lending; the approval of your loan is not determined by the credit score. This was great news for me being that everything ever tried to purchase was contingent upon my credit score.

Just to confirm the accuracy of the information I was reading I decided to call several Hard Money Lenders and to my amazement not one of them asked me to fill out a credit report. With my new secret weapon in place I then set out conquer the real estate world, however many of the lenders still required you to have what's known in their industry as "Skin in the game".

Skin in the game refers to having some of your own money invested in the investment property that you're interested in purchasing. This too can also become a major hindrance to many people who are interested in purchasing investment properties, but if you are blessed enough to have the 20% investment to go alone with the requested loan amount, then you are on your way to flipping for cash.

Unfortunately for me I didn't have 20% in my night stand drawer therefore I had to come up with another way to fund my deals.

What added to my frustration was all of the late night infomercials on real estate wealth which attempted to make this process seem effortless but this proved to be very far from the truth. At this point I actually came full circle and arrived back at the door step of Hard Money Lenders. With a little more research I was able to find a Hard Money Lender willing to fund 100% of my deal if I came in under 70% LTV, and had a credit score of at least 660.

Hard Money Lenders are not like banks, many of the Hard Money Lenders are comprised of private investors. The benefit of dealing with private investors is that the only thing that matters is the profit potential of the deal. This is reason they can overlook your credit because the actual property that you are rehabbing is used as the collateral in order to secure the deal.

Asset-based lending is a term more frequently used in conjunction with commercial real estate financing as opposed to simply hard money which is used for residential as well as commercial finance. Asset-based lending is not necessarily hard money or bridge financing. Hard money is for problem credit, and bridge for short term, hence the phrase "bridge". Instead, asset-based lending for commercial property sometimes actually includes more than real estate. It can include accounts receivable, equipment, patents and other business assets.

The below comments are accurate when the term is used in conjunction with residential finance, but not reflective of commercial finance. Asset based lending is used with all size companies and can allow an asset-rich corporation to receive financing when they are experiencing a need for growth or have not met standard liquidity or credit requirements. They do not always pay a higher rate of interest.

True asset based or "Equity based" lending is easier to obtain for borrowers who do not conform to typical lending standards.

*They may have no, little or terrible credit.

*They may have little income to support the payments, and may need to rely on the loan itself to pay back the lender until the property is either sold, refinanced, or their income resumes.

*They may also have little or no down payment on a large commercial purchase transaction, as would otherwise be required, because they are buying it under value.

*They may have struck a deal with the seller to lend them the remaining balance of the purchase price, not covered by the first position mortgage.

Many Hard Money lenders serve as a sort of bridge lender providing the gap funding in order to get the project completed. I actually discovered Hard Money Lending after the glory days prior to the collapse of the real estate market. During the glory days you simply had to find the deal and many of the HML firms would simply wire you the money with a 24 month term in order to sale the property. Don't get me wrong there are still a few companies that will allow to simply find the property and receive the funds via wire however the majority of the Hard Money Lenders now require that you to have skin in the game.

A few companies I discovered in my research will relax their restrictions after you have had several successful rehabs under your belt. My game plan once I started with Hard Money Lenders was to find foreclosed properties that required very little renovation. I only placed bids on properties that needed cosmetic work only such as paint, carpet, and landscaping. Finding a foreclosed property that will allow you to get it on the market one week after you close will increase the chance of that property selling within the time line outlined in your Hard Money Loan Contract.

The quicker you can repay your hard money loan the more you will move into the low risk category for the lender. The benefits of being in the low risk category means your lender will increase the amount of deals you can work at once, and also increase the loan amounts of your future deals.

The best part of all is many of the lenders will allow you to flip a property with only 20% of your own money invested as well as overlook your credit history. Now if your are amongst the declining group of Americans that still have excellent credit then many of the lenders will allow you to personally guarantee your loan without having to put up the 20% investment. The magic number in order to get a sweet deal such as the one I just described is 720, but for those of you who are in my category then there is still good news for you.

If you remember earlier I mentioned that I found a company that only wanted a 660 credit score and the property had to come in under 70% of LTV or taxable value. The best part of my sweet deal with this hard money lender is they cover 100% of the purchase price in order to acquire the property. So how this would basically work is once I find the property that falls within their criteria then my Hard Money Lender would send a check to my title company in which they would take the first position as lien holder.

I am then given 6 months after closing to rehab and sell the property in which my lender will recoup their investment plus 3 points for the loan. I would in turn keep the difference from their cost going into the deal and the selling price.

Now keep in mind that I placed no money in this deal in order to acquire the property, I simply had to find a house and make sure the purchase price is no higher than 70%LTV. I wanted to share this information with you because like many of you I had no idea that I could buy property without using my own funds or personal credit. Even the closing cost is covered by my Hard Money Lender, how sweet is that?

Finding a good Hard Money Lender can lead to a very profitable partnership and one that can truly be life changing. The only challenge is not getting the funding for the property, but rather the pain in the butt trying to acquire REO'S (Bank Owned Properties). Dealing with Hard Money Lenders requires patience, diligence, and determination.

Patience is required because not all of your deals will get accepted, the details of the deal still has to be appealing to the Hard Money Lender. If a deal is reject it is normally because the lender has concerns that it will take longer than the time they are allowing you to sell the property before the full repayment is due. Another reason your deal might get rejected is the state that your property is listed in is considered a difficult real estate market.

Diligence is required because you may have to submit three properties before one of your deals is accepted. Real Estate Investing is not the field to be in if you are easily discouraged. It takes a certain level of diligence in order to get back out there after being told no, but diligence will always pay off.

Determination is required because after your deal is funded you will have to do everything in your power to make sure you sell the property before the due date. This is the reason you always want to find properties that will allow you to get in and get out as quickly as possible. Buying a high end property may look good on your portfolio but if it takes 18 months to sell it then you will have to eat that cost of holding to property. You will have to be determined to seal this property within the first 45 days after closing.

Overall, having a good Hard Money Lender in your corner will help you accomplish many of your investment strategies. To have the ability to sit at your kitchen table and find properties on your laptop and then place one call in order to get the money for the property is priceless. Banks that are holding foreclosures will welcome your bids because every offer you fax to them will state that this is a cash offer.

In a recent conversation with Teresa Collo of the Business Resource Center she informed me that Hard Money Lender have always been active in the real estate market but only a select few even knew how to contact them. She went on to say that developing a relationship with a really good lender is your first step on the road to wealth.

I would like to add to Teresa Collo's statement that this type of real estate investing is not a get rich quick deal however you do have the opportunity to build wealth over time with discipline, and determination. This article is part 1 of 6 in a series of lectures titled "Building wealth with private money". I am willing to share all the lessons I have learned on the journey to building wealth with private money free of charge, simply visit our website for more real estate funding strategies.

Thomas A. Rothstein