Real estate marketing and beyond

There are many ways to successfully invest in real estate. You don’t hear much about hard money loans these days, but they still hold a valuable place in the investment world. Hard money lenders generally do not value real estate in the same way as most investors and other real estate professionals. As an investor, you need to know your local market well. You should instinctively have a good idea of ​​the property’s value after a brief inspection.

Hard money could be crucial for your success as an investor © caricatures4you – Fotolia.com

What is different for hard money lenders is that they generally lend money outside of their local market. Often across the country. Hard money lenders cannot physically inspect the property themselves, nor do they have a solid grasp of local property values.

Every private contract is written for the mutual benefit of investor and lender, but there are general rules that govern the hard money market. Hard money lenders do not use the standard underwriting process used by banks. Banks focus on the borrower’s credit history and income. A bank loan is usually 90% or more of the home’s value.

Hard money lenders focus on the value of the property rather than the creditworthiness of the borrower. They will consider a professional appraisal, but it is not the only assessment tool they rely on. Often they want at least two and possibly three valuation models to make an informed decision. Hard money lenders will review tax appraisal records, but again, this is not a reliable way to appraise real estate. Tax districts calculate values ​​on an annual basis at best and many only every two years. In addition, the taxman only assesses the property of the sidewalk. They do not have access inside the house.

The Broker’s Price Opinion (BPO) is another tool used by hard money lenders to value property. A BPO is a broker’s assessment of the value of the property. However, hard money lenders are also skeptical of these valuations, as brokers tend to overvalue properties in hopes of a higher listing commission and an optimistic view of the local real estate market.

The value a lender places on a property has nothing to do with the purchase price you negotiated. It will be based on what the market values ​​the property.

In the end, hard money lenders take all available information to make an informed decision. They ask themselves questions such as: “If the market bottoms, will I be able to recover the money loaned for the property? Will I benefit from this property even if I have to regain control in the event of a default?

To fully protect themselves, hard money lenders usually only lend 50% to 70% of the property’s value. As an investor, you will either need to negotiate a purchase price within this range or have additional financing. Also, keep in mind that a hard money lender knows the repair and flip business as well as any investor. They will want to know your exact plan for the property and will need to approve it and the value of the property.

Most hard money lenders provide short-term loans with an average term of six months to two years. Perhaps the biggest advantage that hard money offers is quick closure. Since there is no credit check, closing can take place a few days after an application is approved. An investor interested in hard money needs to know what documentation will be required to approve the application.

If you are not all in a row, funding may take a few weeks, but as little as three to five days is possible. If you have a trusted relationship with a hard money lender, you may be able to get funds within 24-72 hours.

Hard money isn’t for everyone (or even most people). The only reason to take out this type of loan is an excellent investment that requires a quick response. It may cost you 10% of the loan amount for interest and loan fees. But when you can earn 25% off a deal in weeks or months, paying more for fast funding is probably worth it. When a good investment can’t wait, a hard money loan can always be the best answer. What else do you think investors need to know about hard money? Please share your ideas and experiences by leaving a comment. Additionally, our weekly Ask Brian column welcomes questions from readers of all levels of experience with residential real estate. Please send your questions, inquiries or story ideas to [email protected].

James V. Hayes