Jeri: Hello investors. My name is Jeri Frank and I'm CEO of AssetRover. Today I'm here with Liz Nichols, who we first met through
the Iowa City Real Estate Meetup Group. She has led this group now for over 5 years and
it's grown to over 180 members. It's doing quite well. Liz has been leading this and
has been a real estate investor herself for the last 12 years with her husband. She has
most recently joined a group called RE Advantage Capital, LLC, where she is a managing partner,
where she sources private money to investors. Today we're going to talk about now hard money
lending. Hi Liz. Welcome. Liz: Thank you for having me.
Jeri: We're glad to have you here today. What is hard money lending?
Liz: That is money that is more expensive than a loan from a bank for sure, but it has
a specialized purpose. It has a purpose in life. First of all, there are often investors
who can't get a bank loan. They may not be able to get a bank loan because the property
is in too bad of shape to get a loan or because they want to do a loan to buy 3 or 4 or 5
properties at a time and the bank just won't buy that. Maybe they've already got 10 or
15 properties and the bank has said no, your debt to income ratio is now out of whack and
I can't approve any more. Sometimes people even if they have really
good credit will go to a hard money lender, which basically would be money that would
come at a higher percentage of rate. It would be usually an interest only loan for anywhere
from 3 months to 24 months at between 10% and upwards of 18% sometimes, depending on
the property and the level of risk that is assessed in terms of the investor.
There are many people who don't have 700 credit scores, can't get a bank loan or, as I said,
the property is not such that a bank is going to lend on that because it needs too much
repair. Hard money lenders really zero in on that market. They're looking at investors
who have good deals. They maybe are getting it at 65 or 70% of after repair value or better
and they can't get a bank loan, but they are going to maybe flip the property inside of
6 months. A hard money lender is just ideal for that kind of investor, who just needs
short term cash but can't afford to bring all the money to the table to get a deal done.
Jeri: They're really kind of a niche lender? Liz: Yes, but it's a large niche. We're finding
there are even getting to be maybe not hard money, but something in between the bank and
hard money, something called soft money. You can get longer term loans even if you don't
have perfect credit and even some will do it for somebody's residence in a 6.5 to a
9.9% interest rate. If you're willing to put up with that kind of interest rate over a
long period of time or if you simply don't have a choice because your credit and/or the
property do not lend itself to a bank loan, you can get an extended loan with something
called soft money. Those are the two areas that I'm dealing with.
I happen to be dealing specifically with investors, that is people that are buying non-owner occupied
property, and they're usually using it for a short period of time. It used to be that
really there was not a non-bank market for people who wanted to be landlords. Now there
is. If you've got a good enough deal so that you can get it to cash flow and you don't
have totally in the tank credit, usually those lenders will require you to have a 640 credit
or better, but that's … A lot of people are out there buying property that have credit
scores in that 640 to 690 range and can't go to a bank to get the money to save their
life. Jeri: That's great that there are those options.
Liz: Yeah, there are those options now. You just have to make sure you get a good deal,
because those hard money lenders are looking much more at the asset and much less at the
individual. They still want to make sure you have some skin in the game, which means that
maybe you're putting anywhere from 20 to 35% in, but they're willing to look at creative
ways for you to get that 20 to 35%. You might be able to take a property you already have
free and clear and do what is called cross-collateralizing so that you end up with another mortgage on
that piece of property, but only until you've paid off the loan for maybe the fix and flip
you're working on. That's a no money down strategy. You can often
come with no money out-of-pocket, even with a hard money loan, if you've got another property.
Then you can use that same property repeatedly to cross-collateralize your fix and flip deals.
That is a way an investor might … It's advantageous to have some rental property that you have
free and clear. Then if you want to do some fix and flip work, you can often do it with
no money out-of-pocket because you've got another property that you're using as collateral.
If you don't have that, you can find a partner who has the money. You can borrow it. Usually
banks frown on that, but if your great-aunt is willing to give you the down payment money,
it can get into your bank account that very same month that you close and the hard money
lenders aren't going to care, as long as money is there. They'll accept many more creative
ways for you to get the deal done than a bank typically would.
Jeri: Very interesting. Why don't you walk us through a step-by-step process when someone
is going to use a hard money lender? Liz: Okay. I know we talked earlier about
what normally happens and you've got a bank loan and maybe you've gone through a realtor
and you've got a property that you want to use as a rental. Usually the realtor is going
to say you need a pre-approval letter. I can get pre-approval letters too, but it doesn't
have quite the same meaning as going to the bank and having them check yes, indeed, you've
got X amount in your bank account and your credit score is something we can lend on,
so yes, this person is pre-approved up to X amount of money.
Instead, a pre-approval from a hard money lender is really going to mean that hard money
lender has X millions of dollars to loan and provided the deal pans out the way it's been
presented preliminarily to them, they'll be able to lend to you. It's contingent on finalizing
the process, but you can get a pre-approval. What you really need to start with a hard
money lender is a contract in hand. I often help people, educate them before they've
actually signed a contract to make sure it's a good enough deal. This is just one of the
value added services of having a broker, incidentally; they'll kind of help you through the deal.
I'll look up on various sites that mortgage lenders look at to determine valuation, and
they're very often very accurate, so I can tell even before someone signs a contract
whether it's a deal that's going to fly with the hard money lender. If not, you know how
much out-of-pocket they're likely to have to spend, so before they've actually put the
money down I can usually tell them whether the deal is going to fly or not.
Then we'll start actually vetting different hard money lenders once they have a contract.
If you can give me as a broker or really any hard money lender 14 to 21 days before you
need to close, we can usually find 2 or 3 lenders that would be interested in doing
the deal and you'll have a pretty good idea right up front of what you're going to have
to have to come to the table with for the deal. Once you've got the contract and we've found some lenders, you'll expect most of them will
require an appraisal. There's really no way of getting around it. There are very few lenders
that will just allow you to hand over a broker price opinion and get a property that way.
In that respect, hard money lenders are similar to banks. You have to build in enough time
in most cases for that appraisal. That is usually the only money out-of-pocket that
you will spend before you get to the closing table, about $450 for a typical single-family
dwelling appraisal. It will be a third party appraisal that will be selected through a
service that the lender has, again very much like with a bank.
Then we'll go through and do an application. Usually the application is not very tough
to do and I can help an individual through that process. They usually either ask for
bank statements and/or they will ask for permission to pull a tax transcript. Again in that way
similar to a bank, but they're not going to be looking at things like debt to income ratios
or how many dings you have on your credit report. They're usually using the credit report
that they will also be pulling to determine the interest rate. The better your credit
score, the lower risk that they'll see you as, so you might be able to get hard money
at 10 to 12% if you have 700 or above credit. More typically for people who have lower credit
scores, you'll be in the 13 to 15% range for a typical fix and flip type loan.
The lender then has an underwriter who will vet the whole process. They'll take the application
and the documentation and the underwriter will coordinate it with your closing attorney
or closing title company. Then it will be very much like any other process of buying
property, where you go to the closing table after you've looked through a HUD-1 closing
statement and everybody has to sign off that those numbers are accurate.
That's really pretty much the process. It's a simplified version of what you'd go through
with a bank, where they're much more interested in making sure that you've got a good deal
and a good property than they are in you particularly as an investor.
Jeri: For that whole process from beginning to end, are we looking at a 30 day time frame?
Liz: Yeah. You can get through it usually in less than 30 days, but most brokers will
feel most comfortable if you can at least give them 21 days. I do work with a few local
investors who are private lenders and for particularly well qualified investors, people
who have done a lot of deals and know exactly what they're doing, I have actually been able
to get loans closed in less than 7 days with the private lenders, with very little paperwork
and with a broker price opinion instead of an appraisal. It is possible, but I'm generally
not going to be recommending someone who is a brand new investor.