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Monday, April 1, 2019

WHAT IS HARD MONEY?

Hard money in Arizona and soft money can be used to describe coins and paper money and money used in political campaigns. However, it can also have to do with loans.

A hard money loan is a specific asset-based loan through which the borrower receives funds that are secured by the value of real estate. Texas Hard Money Loans are typically issued by Arizona Hard Money Lenders or companies. Anything that refers. To “hard” refers to something tangible—in this case the tangible item is the property.

Many people have a negative connotation with the phrase “hard money.” They can’t seem to get past the higher interest rate. You have to realize that although Texas Hard Money Loans do have a higher interest rate, these are short-term loans. It is very possible that these loans may only be two to three months. So, it is very feasible that you may only pay a few hundred dollars in interest.

BENEFITS OF HARD MONEY

Arizona Hard Money Lenders are generally lending money on properties that require repairs. Other lenders, such as a bank, won’t lend money for these types of properties.

The money is much faster in regard to a hard money loan. A bank can easily take 60 to 90 days to close on a loan—whereas, a hard money loan typically closes in less than two weeks. All a lender really needs is an appraisal and a repair list—viola, it can close and you can claim the title.

Real estate investors who are working volume use hard money, because there is literally no other way to buy multiple properties to rehab. Generally lenders will lend 70% of ARV (after repair value). What that means is if a property costs $70,000, but will appraise for $125,000 after repairs are made—the hard money lender will lend 70% of $125,000—which equals $87,500 on a $70,000 property. This can fund the acquisition and repairs, as well.

Arizona Hard Money Lenders will also lend more the repairs if necessary. However, you won’t receive a check for $40,000 if you have figured out that is the amount of money you will need to rehab the property. Instead, Arizona Hard Money Lenders use “draws.” A draw is the money that will be loaned to the borrower for repairs once an estimate has been given.

Using a hard money lender can allow a borrower to not come out of pocket at all if the price is right on the property.

Although, an investor can find a project that they do not have to come out of pocket a penny—that does require finding that golden deal. There are lenders that will loan 90% of the ARV—and occasionally, you can find funding for even more. However, when looking at properties keep your expectations at 70% ARV. And, remember these are short-term loans that also typically have no early payment penalty. It is quite possible, when all is said and done, the only money you will use out of pocket is your payment on interest.

Dennis Dahlber Broker Ri CEO Level 4 Funding LLC Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

HOW PRIVATE MONEY LOANS ARE STRUCTURED

There is structure to how private money loans are broken down. This concerns your money and it is wise to understand exactly how the private money loan is broken down.

Sometimes when a borrower doesn’t have the money that is required for upfront fees the money can be wrapped into the total loan amount. The easiest way to understand this is to break it down. Let’s look at an example.

EXAMPLE OF A PRIVATE MONEY LOAN

John has decided to get into the real estate game. He has been researching fix and flips and watching a lot of HGTV. John has even found the perfect property to rehab. But, John has no money. He turns to a private money lender.

John found a house with a purchase price of $50,000—this includes the closing costs. The closing costs include transfer tax, title insurance and closing fees. However, then there are some fees that John has to pay upfront—these are fees that can’t be paid at the end of the deal.

Along with the purchase price, John also has a $600 bird dog fee. A bird dog is an investing term that refers to someone who spends their time locating properties with substantial investment potential. Usually, investors use bird dogs to increase the area in where they are looking for property. John has a $500 insurance bill that was required to be paid upfront, as well. He also has Self Directed IRA fees (SDIRA). These are fees that an investor can potentially get charged. It is not the lender’s responsibility to pay money while they are lending. Therefore, it becomes the borrower’s responsibility. John has a $400 SDIRA fee that he needed to reimburse the investor for. He also has to pay $650 in loan points.

All in all John now has $2,150 in fees that need to be paid upfront before he can get his $50,000 loan for his property. What can he do? John simply borrows the fees, as well. Instead of $50,000, he is now at $52,150. However, John is not finished. He also has rehab costs. Rehab funds are not given all at once. These are called “draws.” An investor doesn’t just give all the rehab costs to the borrower. Instead, they are given bit by bit as projects progress. The investor will need proof that these repairs are needed and completed. So, John has $20,000 in rehab draws. In total John will borrow $72,150. The ARV on this property was $100,000. John’s lender financed 100%, so John had no out of money expenses. After interest rates and so on, John profited close to $25,000 with no money down.

It is important to understand where your money goes when dealing with private money loans.

Make sure you are dealing with a lender that explains everything to you. Have them sit down and show you where every penny will go. Not knowing the structure of your private money loan is you walking blindly into a real estate deal.

WHERE CAN YOU FIND PRIVATE MONEY LENDERS

You’ve found the property you want to rehab. Now, where do you find the investors to give you the money?

You’ve got your ducks in a row, but the final and most important part of the deal is finding an investor to loan you the money to fix and flip this property. There are three key areas where you can find private money lenders.

THE THREE PLACES TO FIND PRIVATE MONEY

The first place you can look for money is your own personal network. To most this is a pretty obvious place to begin your search for financial backing—at the same time people are uncomfortable with this scenario. Usually, this feeling comes from embarrassment. You have just decided to enter the real estate game and you may not feel too confident—that’s where the embarrassment comes in. It’s no different than if you were an attorney and out of nowhere you decide to quit the world of law and become a poet. Yes, people would probably feel a little shocked in the decision you made—they will wonder why you chose to quit a career you excelled at to become a poet. Usually when you are honest and vulnerable people will react in a positive manner. Use your contacts and speak with your friends and family to see if they are interested in being a part of your new career. They might—and they might not.

Another place you can find private money lenders is at local real estate functions. How do you find one of these meetings? The easiest way is to go to meetup.com and search real estate investing meetings. Every city has these meetings—all across the county. This is where you will find others who are doing the same thing as you. You will meet real estate agents, fix and flippers and private money lenders.

The last place—and probably the most effective way to find private money lenders— is finding a local hard money lender. Arizona Hard Money Lenders are private money lenders— the difference is, that is all they do. These investors work like banks without all the red tape and waiting. Arizona Hard Money Lenders can be found through a simple Google search. Another great way to find Arizona Hard Money Lenders is through LinkedIn. Find some lenders, meet with them and get to know them. These lenders all have a specific niche. If you are a fix and flipper—make sure the lender you find works with fix and flips. Check out their website. Do they look professional? Find out about their history. Do your research.

There are three main ways to find private money and all of them can work.

Reach out to your family. Maybe some of them want to be a part of your real estate journey. Mix and mingle at local real estate functions—find others that work in the real estate profession. You never know who you will meet. And, finally there is always the rock solid choice—research local Arizona Hard Money Lenders.

Sunday, March 31, 2019

TIRED OF BEING DENIED A BANK LOAN?

If you have tried to be approved by a bank, but keep getting denied—what can you do?

Are you ready to get out there and crush it in the real estate game? The first thing you must do is be approved for the financing of your project. Your creditworthiness may be enough for financing, but it may not be—and even if it is, will you be approved for as much as you need? Regardless, there are ways you can get financing no matter your situation.

First thing you need to know is not every bank is created equal. Banks have various lending programs. They will take your information and basically see what program they have that you may qualify for. The unfortunate part of this process is that it’s common to go through the pre approval process and then guess what? They will put a big, fat denial stamp on you. You may spend a lot of time bank hopping with hope in your heart only to get stamped with the big D once again.

The next logical step is to visit a broker. A lending broker will look at your situation and match you with a variety of banks and their programs. The problem is this will not be your primary residence. Banks aren’t comfortable lending on properties that will be rehabbed and sold—fix and flips. They also are hesitant when it comes to Arizona Construction Loans. So, where does that leave you now?

ARIZONA HARD MONEY LENDERS WANT TO LOAN YOU MONEY

A hard money lender is literally a lender that is also an investor. That means they have money to loan you and on that money they expect a nice return. These are higher interest rate, short-term loans — usually between 6 months to 3 years.

These loans are asset based. That means the property you are purchasing is used as collateral. Unlike banks who focus on your credit score and your income, Arizona Hard Money Lenders are not overly concerned with your financial situation. They will look into your financial history. However, hard money underwriting is a much simpler process than that of a bank.

In fact, because of the simplistic process of underwriting borrowers can receive approvals much faster than when using a bank—typically between 24 and 48 hours. Funds are generally released in less than 2 weeks. Again, much faster than a bank. A conventional mortgage can take up to 90 days to close. This speedy process allows borrowers to capitalize on prime property without the worry of losing it to a cash buyer.

Conventional financing works for many situations—however, when an investor wants to be a game changer in the real estate business they need to have access to fast cash.

Using a hard money lender versus traditional financing has many benefits: quick access to cash, less concern of your financial state of affairs and building a personal relationship with you lender— one that can lead to lower interest rates on future endeavors.

THE BEST LOANS FOR HOUSE FLIPPING

Hard money loans and bank loans are the most common financing when it comes to real estate. But, what is the best loan for fix and flip projects?

Depending on how many properties you are working with at a particular time will navigate what type of financing is necessary.

Initially, new investors go to banks for financing. Typically, they don’t look toward hard money or private money. If you are going to do this you will need to look for local portfolio lenders. These are local banks that lend their own money. These are not big banks such as Wells Fargo and Bank of America that will approve and lend on a mortgage, but later on will sell these mortgages. These are smaller, local banks that will keep the mortgage in-house. The benefits of these loans are the low interest rate. These rates run between 4% to 6.5% at any given time.

However, there are major drawbacks to these small bank loans. Initially, you will be required to put more money down. Typically, an investor will be looking at upwards of 25% down. That’s a big chunk of change. That 25% does not include all the fees that will have to be paid, as well—that is additional money required. To add on to that, the investor is left to pay for all repairs to the house. These types of loans do not cover rehabbing.

So, if the house is $100,000—the investor puts down $25,000. Let’s say the repairs are $20,000—that’s $20,000 the investor has to come up with out of their pocket. So far, that is $45,000 that an investor will have to pay on a $100,000 house. That just doesn’t make sense.

WHERE ELSE CAN I GO TO GET A LOAN?

Arizona Hard Money Lenders are an avenue that investors can choose to borrow from. This option works great for many investors. The rates from a hard money lender will definitely be more than that of a bank. Rates can run anywhere from 7.99%-15%. The great thing about Arizona Hard Money Lenders is they will lend you more money. It is common to hear of a hard money lender financing 90% of the purchase price. On that same $100,000 house that the bank only lent $75,000—a hard money lender will lend $90,000. On top of that, a hard money lender will finance the repairs on the property, unlike a bank loan. Many lenders will lend 100% of the repair costs. How that works is you get what is called “draws,” As you make the repairs, inspectors will come out—the hard money lender will study the report and then authorize the cost of the repair. Arizona Hard Money Lenders will lend on more than one property at a time. Also, Arizona Hard Money Lenders want to know they can trust an investor. Once they see a relationship forming, interest rates and points usually become more manageable.

Traditional mortgages can be a great tool for financing, however when it comes to properties that will be quickly rehabbed and sold using a bank loan just doesn’t make financial sense.

To find a hard money lender in your geographic area simply conduct a Google search and allow Google to know your location.

WHO SHOULD USE HARD MONEY?

People often associate hard money with being hard to get. However, the “hard” relates to the hard asset that is used to secure the loan.

The hard asset that is used to secure the loan is used in place of the borrower’s credit score or income—this is what traditional lenders use to determine a borrower’s eligibility. It use to be that homeowners would use these loans when they were denied conventional financing—that is not as much the case anymore. Typically, real estate investors use hard money—they can use them to fix and flip a single family home and resell the distressed property, small commercial bridge loans and construction.

WHEN TO USE AND NOT USE HARD MONEY

A lot of investors don’t use hard money with their first deal—mainly because they aren’t well-informed about the process, but also if they have friends or family that will finance them, they usually choose that path. After seeing that they can only do one deal at a time using friend’s or family’s money—and wanting to ramp up their investments they typically find a hard money lender. Many investors use Texas Hard Money Loans for distressed properties that don’t qualify for conventional financing. Many borrowers use hard money when they qualify for a conventional loan, but need to close in a short amount of time.

Texas Hard Money Loans are not ideal for a foreclosure bail out. Being in a foreclosure situation and using hard money to fix the issue at hand will probably result in getting the borrower in even deeper. Texas Hard Money Loans are not usually used for a property that a borrower is going to have as their primary residence. Most Arizona Hard Money Lenders don’t like to lend to these types of situations. And, with the higher interest rate and short terms a hard money loan isn’t ideal for a primary residence.

The rehab of property is the most ideal project for the use of hard money. Most lenders will lend a portion of both the purchase price and the construction. However, there are some lenders that do not want to deal with the hassle of the construction inspection or the uncertainty of a property. Each lender has their own niche and it is the borrower’s responsibility to research lenders to find out the best match for them.

Texas Hard Money Loansare not for everyone. However, there are many ideal situations in where hard money makes sense.

If the goal is to simply find a distressed property and fix and flip—there is no better lender than a hard money lender. This is what most lenders focus on. There are Arizona Hard Money Lenders that focus primarily on construction, small business loans and even residential bridge loans. However, if a borrower is looking for a 15-30 year mortgage, hard money is not ideal.