Many conventional lenders simply don’t understand how renovation real estate works and don’t offer a loan product that supports it.
Hard money loans are one of the best ways to get around this issue.
They allow you to seek out a private investor who has a deep understanding of the fix and flip market.
Use this guide to learn the basics of hard money lending and what you need to get started.
Watch our video on Fix and Flip Properties and Getting It Off The Market.
How To Use Hard Money Loans
A hard money loan is very different from a traditional mortgage. It’s short-term, usually no more than 12 months, and has significantly different terms. The application process is also much more involved than with a traditional lender.
Hard money loans aren’t for buying a house you intend to live in. They’re designed to allow you to purchase, renovate, and flip a property as an investment. In most cases, you’ll be dealing directly with an investor rather than a bank. There are tradeoffs to this, the biggest being the higher interest rates charged by hard money lenders.
One of the biggest reasons hard money real estate lenders are needed is their speed. Attractive investment opportunities can come and go in a very short time period. A traditional mortgage usually takes at least 30-45 days to fund. Private lenders can get the money to you in under a week.
Applying for a hard money loan is far more involved than a standard home mortgage. You don’t just fill out a form for a hard money loan. Instead, you’ll need to provide detailed information about every aspect of a properties investment value.
Before You Apply
Hard money lenders first and foremost are business people. They have experience working with renovation investors and they understand what makes a good investment. You have to come into a meeting completely prepared to answer their questions.
Let’s get one thing out of the way early, in order to qualify for a hard money loan you have to have money to invest. Most hard money lenders will only lend up to 60-70% of a properties value. If you can’t cover the other 30-40% you’ll have no chance of convincing a lender you’re a serious investor.
You’ll need detailed information about everything from the current value of the property all the way up to the curb appeal of a neighborhood. Start by looking at sales records for an area and figuring out how much you can put into a renovation.
It doesn’t matter how nice you make a house if the area itself won’t bear a major price increase. In most cases, this means you’ll have very strict requirements when looking for potential properties.
You can’t just walk into an investment opportunity. Spend time figuring out exactly what you’re looking for and exactly what kind of profit margin you have.
The Application Process
Because hard money lenders deal mostly with investment properties they’re usually just concerned with the property’s financials. They’re looking at the available equity in a property and a potential borrower’s own ability to complete a renovation.
Things like creditworthiness have less meaning in this market because there is security in the property itself. It all comes down to the value of the property and your plan for it.
If you show up with a well thought out and thoroughly researched plan for an investment they’ll take you seriously. You need to have bids from contractors, materials estimates, and sales records for similarly renovated homes in the same area.
It all comes down to proving to the lender that your estimate on the value of the house is accurate and that you have a fully realized plan to renovate it. Because you’ll likely be dealing with a private investor there are fewer standardized forms to fill out.
Expect to spend a reasonable amount of time with them to make your case and present your numbers. Be ready to answer any questions they have about the condition of the house, the repairs needed, and have the documentation to back it up.
Things like architectural plans and detailed timelines are absolutely essential.
Have a Team
Many people watch those home renovation shows and start to wonder what’s stopping them from flipping houses. The best answer is knowledge and networking. Without the knowledge, you won’t know what a good investment property looks like and without a network of professionals, you won’t be able to act on one you find.
Make sure you have a good relationship with a contractor, a good real estate broker, a CPA, and a real estate attorney. This is the absolute minimum you’ll need to make a go at it.
This allows you to quickly identify properties and check for any legal issues. Then you can get an accurate estimate on materials and labor costs and figure out exactly what you can spend and still make a profit.
The speed of a hard cash loan is one of its biggest benefits, but unless you’re prepared to move at the same speed it’s worthless to you. Be prepared to set things in motion immediately after you get approved for funding.
Visiting a hard money lender should be the last thing you do during a fix and flip. You need to be able to give the green light and have the property purchased and the renovation crew inside immediately.
Once you’ve begun work make sure to provide regular updates to your lender as required. Some like to be kept up to date on everything that’s happening while others prefer monthly or quarterly reports as long as your payments are on time.
Are Hard Money Loans Right for You?
Hard money loans aren’t for everyone. They’re a great way for knowledgeable investors to fund thoroughly researched projects but that doesn’t mean they’ll work for you. If you’re serious about seeking out a hard money lender you’ll need to have all your ducks in a row well before the meeting.
If you’ve been considering a hard money loan for your next real estate investment, contact us today to get the ball rolling.