Creative Finance – Find a Hard Money Lender

The easiest way to use creative finance is to get a real estate loan from a hard money lender.

There is a simple rule in real estate that if you find a great deal then finding the money is easy. The reason for this is that hard money lenders will fund 100% of your deal if it is a great deal.

A hard money lender is usually a private lender who lends based on the value of the asset pledged as security as opposed to the creditworthiness of the buyer. Think of a hard money lender as an asset backed lender.

This means you can have no cash, no credit and no experience and still get a loan if the deal is a good deal. The question then becomes what is a good deal?

Hard money lenders will generally lend up to a maximum amount of 75% of the fair market value of the property. 75% of the fair market value may be more than 100% of the purchase price of the house.

As an example, if you find a house worth $200,000 and you can buy it for $130,000, the hard money lender will lend you 75% of $200,000. That’s $150,000 which is more than 100% of your purchase price.

The hard money lender may also give you the cost to fix up the house if the Loan to Value stays under 75% of the After Repair Value (ARV). Let’s say that you needed $20,000 to fix up the house and that the after repair value of the house would be $200,000. In those circumstances most hard money lenders would give you the $130,000 you need to purchase the house plus the $20,000 you needed to fix up the house. That’s a total of $150,000 with no money out of pocket by you.

I’ve noticed that hard money lenders have tightened up their lending criteria following the downturn in the real estate market. Most lenders will appraise the property lower than you expect and require some kind of down payment – even on the best deals. Just like regular bankers, hard money lenders like you to have some “skin in the game”.

Experienced investors rely on hard money and private lenders to finance most of their deals. It’s usually really easy to work with a hard money lender as the credit application process is much simpler. 

There is a significant cost to using hard money. The interest rates are usually high around 12% to 18% and you will normally be required to pay between 3 and 5 points on the amount of the loan. A point is equal to 1% of the loan amount so one point on a $150,000 loan is equal to $1,500. The cost is bearable in a short term project but is prohibitive in a long term hold. 

The one big drawback with hard money is that most loans are short term, usually between 6-months and a year. The reason for this is the lender wants his money back so he can lend it out again and get another 2 to 5 points. 

The short term and high cost makes hard money suited for short flip projects as you will need to either sell the property or refinance into more reasonable interest rates.

In the next article I’ll discuss owner finance or owner carry.

About Ross Hair

Ross Hair is the Real Estate Advocate and founder of eRealEstate.com, a social network for real estate investors and real estate professionals.