Real estate investment is a broad and complex enterprise. Whether operating properties for rental income; purchasing and holding them for value appreciation; or buying and selling tax lien certificates, entrepreneurs understand the intrinsic value of real property.
Prominent among such businesspeople are those who wholesale, i.e. the rehabilitators who purchase, fix up and resell ailing and neglected homes. Recognizing the importance of profiting from the resale, rehabbers understand the necessity of minimizing their inputs – time and money.
With this reality in mind, few are eager to get caught up in the red tape of traditional or government-subsidized rehabilitation loans. “Hard money” might just be the right avenue for such an undertaking.
What Is “Hard Money?”
Hard money is not so named because it is hard to come by. True, lenders of hard money are not pushovers but neither are they misers.
No, this money is hard in the sense of a hard target or hard deadline. Its aim is very specific, as are its conditions. Unlike a traditional mortgage loan (or FHA, VA etc), hard money is lent by individuals or partnerships. Its sources are investors who are less interested in the financial reputation of the borrower than in the collateral property – and the borrower’s plan for restoration.
Should a borrower default, a hard money lender is prepared, according to the terms of the loan, to foreclose and take possession of the property.
Unlike a conventional bank, a hard money lender is not burdened by an inconvenient inventory of seized properties. In addition, hard money investors are not ruled by the preferences and constraints of the secondary market. They make their money from the borrower’s sale, not Wall Street.
3 Reasons a Hard Money Loan is Superior to a Traditional Loan:
Traditional loans have to pass through many hands. From filling out the paperwork to the loan officer’s satisfaction to sending (and re-sending) supporting documentation to arranging for title searches, insurance certification and employee verifications, much valuable time passes before a settlement date is scheduled (…and that is subject to multiple re-schedulings).
Approval and closings are quicker with hard money because it is the project that matters above all, and the investor must answer only to him or herself.
2. Fewer Restrictive Rules
One of the reasons traditional banks and finance companies are so cumbersome in their proceedings is the necessity to conform to uniform regulations…by their own investors and by government regulators.
Underwriting, for example, is most often run through standard-issue software. Exceptions to the results must be done manually, another lengthy task. With an individual financier, borrowers can more easily negotiate terms and repayment without having to do so according to regimented calculations.
3. Approval Standards
As noted, those who issue hard money are most focused on the collateral…and how much they can make from the borrower’s re-conveyance proceeds. Because of this, debt-to-income ratios are not nearly as crucial as the loan-to-value ratio, which they want to see as low as is possible. Some will only lend on a maximum LTV range of 50 to 70 percent.
Unlike mainstream lenders, a hard money investor can sell a house with high equity quickly and easily. Consequently, the bar is lower for other traditional loan indicators, e.g. credit scores, total debt, time on the job, etc.
Does Hard Money Have Any Negatives?
Hard money is pricey: the interest rates exceed those of conventional and government-backed mortgages. For wholesalers who fix and flip in a timely fashion, this should not be troublesome. Still, there are always unplanned circumstances that can delay the re-sale by months. The interest charges add up in such cases. In addition, some private money lenders are known to impose hefty origination fees.
Other challenges relate to value. Since collateral is king to hard money investors, appraisal calculations tend to be more strict than with run of the mill mortgages.
Whereas big banks and finance companies are usually content with drive-by appraisal reports, hard money people seek full appraisals before deciding whether to lend. The difference, of course, is that drive-bys do not have access to the interior of the house. While these summary reports work out most of the time for banks, private investors are more wary of unpleasant surprises that might lower value estimates.
How Do I Know Which Option to Take?
The individual real estate flipper must take stock of his or her own position when deciding whether to opt for hard money.
Is wholesaling a sideline or a career? How many deals are going on at once? Are higher fees and rates affordable? How much time will the project take?
Ideally, hard money loans are for the short term. Absorb the high principal and interest for a few months and then pay it off at re-sale. If a real estate investor envisions a more drawn out process, enduring the protracted traditional loan approval proceeding could very well save significant dollars. Those with less than perfect credit can always look at loans guaranteed by FHA, the VA or USDA, for example.
By contrast, experienced flippers who handle multiple properties simultaneously are better suited to avoid costly delays and unforeseen problems. Efficient wholesaling benefits from quick and streamlined financing as offered by hard money investors.
Why Orchard Funding?
Orchard Funding is a hard money lender that is intimately familiar with the fix & flip process. Founded by successful rehabbers, this company recognizes the potential of properties in terms of return on investment…for Orchard and the rehabbers it backs.
Granting loans of up to 90 percent LTV (and 90 percent of rehabilitation costs), Orchard draws on finely honed expertise in selecting the most promising deals. Bridge loans and construction financing are also available.
Contact Orchard Funding Today
Fix and flip professionals with profitable properties in their crosshairs should contact Orchard Funding without delay. With offices in Arizona, California and Colorado, Orchard Funding can be reached at (310) 356-7373.