Hard Money Loan Tips
The procedures for applying for a hard money loan vary from lender to lender. Most lenders though follow the general guidelines listed here below. Simply follow these steps and you should be ready to get you deals funded quickly with a hard money lender.
1. Find a Convincing Real Estate Investment
If you’re not convinced that the property you are seeking funding for is a good enough deal for it to be approved by a hard money lender…then you’re probably right and you probably won’t be able to convince the hard money lender that the deal is good enough either.
Do your research: find other comparable sales in the same neighborhood or same area to see what’s listed for sale on the MLS or for-sale-by-owner (FSBO) that are similar to your property. Search free online tools like zillow.com and your local county tax assessor’s office for the assessed value on your targeted property to get a rock solid picture of what your property is worth as-is & after rehab.
Remember – hard money lenders use “After-Repair-Value” to determine the amount of funding they’re willing to put into a deal…so if you find a great deal they will give you funds to buy the property & Repair/Update/Rehab the property too.
Here are a couple of general rules to hard money:
Hard money lenders will loan up to 65% of the ARV of a real estate property. This amount can/usually includes the funds for repairs that need to be made to bring the property back to
fair-market conditions, closings costs and even other miscellaneous expenses.
Hard Money lenders will also ONLY lend on non-owner occupied properties. This means you can use hard money to fix up or buy a house you are planning to live in.
Here’s a simple example of the formula rehabbers and wholesalers use to determine ARV:
65% ARV – Repair Costs -Closing Costs = Purchase Price
For example, a fixer-upper may be sold for $100,000 once repairs are completed (ARV=$100,000). In order to bring the property to saleable market condition, you will need $15,000 in repairs. Factor in another $5,000 for closing costs and other expenses for a total of $20,000 in costs.
So in this example you will need to negotiate a purchase price of at least $45,000:
$100,000 x 65% ARV = $65,000 – $20,000 expenses = $45,000
Once you have completed the repairs on the property, any sale price you agree to for its re-sale is your profit. You are basically writing your own check.
2. Find a Reliable Hard Money Lender
There are various ways to search for a lender in your area. You may want to ask friends and fellow real estate investors for. Every major market in the country has local Real Estate Investment Associations (REIA’s) which are an excellent way to network with local hard money lenders. These days, you can also do it all online, which is much easier and faster. Simply search google, or visit craiglist and backpage for quick sources of hard money for real estate deals.
Once you’ve found a lender, contact it and inquire about the requirements. Usually, they will need the documents mentioned below the first of which is the executive summary.
3. Write an Executive Summary and an Exit Strategy
An executive summary is simply a summary of the investment you wish to make with the help of the hard money loan. Remember two words when doing it: “short” and “details.” A single paragraph of a few sentences can actually serve as a good summary. Do not burden hard money lenders by writing a novel. Think of it this way: If you had to read three stories in a day, in a few hours, which one would you read first, the long, the medium, or the short one?
The executive summary must be filled with details despite its conciseness. Here are the details that you must include in the summary:
• Amount of loan needed
• Reason for borrowing money
• Timeline of the investment
• Your Exit Strategy
The first two items are self-explanatory. It’s important to give an accurate estimate for the timeline of the investment so you don’t give yourself too short a window to make the repairs and then re-market the property.
The final important part of you executive summary is your exit strategy. And it is important to not only list your exiting plan for paying off the hard money loan, but also any conditional exit strategies you may use if your primary exit strategy somehow does not work.
If you don’t have a clear exit strategy, make sure to discuss your options with experts or more experienced real estate investors.
4. Fill Out the Loan Application
Secure an application from the lender. Make sure you fill it out as completely, as accurately and as honestly as possible. You can avoid hassles like having to resubmit the form by properly reviewing you application before giving it to the lender.
5. Include a CMA and a Lot of Pictures
A comparable markets analysis (CMA), or simply comps, is a good way to support the ARV you established in your application. If you’ve already performed your own comps on the property you want to buy, send it to the lender as well. Make sure it has lots of pictures of the actual property, the comparable properties, and the neighborhood in general. Also, you may want to ask the lender how he or she wants to receive the information – some prefer printed documents while others prefer the convenience of online media like emails or photo & video-sharing sites.
6. Submit a Contractor’s Estimate
If you’re planning to rehab a property, and most likely you are, be sure to include a contractor’s estimate. This document will support your estimate on repair expenses. The estimate, which should be easy to understand and in writing, will give the lender an idea on why you need such amount for repairs. Also, ask your contractor to draw a timeline of the repairs.
Traditional Lenders like banks want to see a good credit score when they evaluate potential borrowers. In the case of hard money lenders, what is important is the deal itself. If the deal is solid and a potential money-maker, then it should get approved. That means that you shouldn’t need to work on your creditworthiness. But you will want to “back up your bid” to make you more attractive as a borrower.
So if possible, list:
• Real estate properties of other large assets – This will help demonstrate that you have the ability to cross-collateralize (use these assets to help secure the hard money loan) in cases where your deal is borderline or there is considerable exposure to the hard money lender.
• Cash – This is one way of showing the lender that you have reserves and can handle money. It also eases any lender concerns of you ending in default in case emergencies occur, repair costs are under-estimated, repairs take longer than expected, re-sale takes longer than expected, etc. during the course of the investment.
• Experience – Many borrowers are able to secure hard money from lenders based on their experience. It’s a goal you should shoot for as well. Establish a solid track-record with a lender and funding your deals can be as easy as picking up the phone and making a call to your trusted lender. If you’re just beginning don’t worry, just focus on the finding really good deals as you establish your experience. Another option is to partner with someone who does have experience.
• Credit History – Most banks and other traditional lending institutions base their loan approvals on credit history: hard money lenders don’t. That doesn’t mean you shouldn’t strive to maintain an excellent credit rating – and it also doesn’t mean that if you have excellent credit you can’t use it to help speed up your hard money loan process. If yours is good, then flaunt it. If it’s not so good, then just stress your strong points using the elements above.
8. Submit All Documents and Build Trust
When you complete all the needed documents, organize them and submit them to the lender for evaluation. Instead of waiting – and hoping – be proactive and work to build your lenders trust. Touch base with them regularly (but don’t go overboard and bug them !) Talk about things other than you loan. Talk about your plans after you complete the project. Be sure to answer the phone when they call. Check your email regularly and return questions immediately. Prioritize submitting extra document they might ask for during processing.
Building trust is not only important for your current application; it is also a simple exercise for long term goals. As stated above, once you have established a solid relationship with a hard money lender your approval process become much, much easier.
9. TAKE ACTION!
Quit “getting-ready-to-get-ready” and get started today!