Real Estate Coaching, Land, Property & Improvements – One of the most popular questions I’m asked is how to find honest private/hard money lenders.
I’m an experienced Realtor, real estate investor, coach and mentor.
There seems to be an infinite number of lenders available to investors and that’s why it’s important to be able to identify ethical lenders. All lenders are not created equal. It’s unfortunate but there are lenders in the market taking advantage of unsuspecting investors.
So here is an explanation of what you need to know before shopping for a lender.
Hard money lenders provide short-term loans that usually run from six to 24 months. Some lenders offer longer terms. They are typically set up as interest-only payment loans amortized over 30 years.
The borrower makes a balloon payment at the end of the loan to repay the principal. The loans usually cover from 60 to 80 percent of the properties after repaired value (ARV).
Hard money loans can have high interest rates, loan origination points, lender fees and charges.
Not all hard money lenders charge those fees and I personally think many private lenders take advantage of their ability to do so and thus are ripping investors off.
Be careful when a lender wants to charge you so many fees and don’t be afraid to ask why and to even challenge them on those fees and the amounts.
Hard money loans carry interest rates ranging from 8 to 18 percent. The interest rate depends on the loan amount, the property’s ARV and in some cases the borrower’s credit rating.
A borrower with bad credit is charged a higher interest rate than someone who has a good or excellent credit rating.
For example, if you make an interest-only loan for $100,000 at 9 percent interest, your monthly interest income is $750. If the borrower’s credit is poor, you can charge 15 percent interest and earn $1,250 per month.
While the interest rate can be high, it’s not called “hard money” because of the high interest rate. It’s called “hard money” because the money is being loaned out against a “hard asset” - the physical property they are lending on.
Hard money lenders who base their loans and rates from a person’s credit score are not doing you any favors.
The loan and rate should be based on the subject property and the numbers since the lender is loaning against a Hard Asset being the property.
In my opinion, your personal financial situation and credit score should not come into play in a hard money loan.
Most private money lenders charge “points.” What is that? I’m glad you asked. Points are fees paid by the borrower to the lender and/or the broker for putting the loan together.
The number of points charged depends primarily on the loan amount and the borrower’s credit. Points have a one-to-one correspondence with interest.
A loan with one point equals 1 percent of the loan amount. A loan with two points equals 2 percent of the loan amount. For example, if you make a $200,000 loan and charge the borrower three points, you earn an additional $6,000 ($200,000 multiplied by 3 percent).
Other Costs and Fees. Hard money lenders make money off other loan costs and fees. Underwriting fees, which are charged to evaluate a borrower’s likelihood of default, can earn you another $750 to $2,000.
A loan-processing fee adds several hundred dollars more to your cost.
Document preparation fees, which are charged for preparing the loan documents, could cost several hundred dollars.
Other sources of hard money loan income for the lender are fees charged for document courier services, property inspections and in-house notary services over the actual cost amount.
Some lenders charge administration fees that are unreasonable. I don’t like paying administration fees because I feel it’s just another profit margin for the lender.
I guess a small admin fee between $200 to $300 is acceptable, but when they’re more than $500, I just think it’s nonsense.
Some lenders even try to justify a “file fee.” A file fee is just more nonsense for profit. I’ve seen file fees run between $400 and $1,000.
That’s just crazy and in my opinion, unethical… While some charges are justified, I always make sure they are reasonable and not inflated.
You can check this out by doing information searches on-line.
So, there you have it. It can be crazy and scary for any investor, new or experienced dealing with private / hard money lenders. You must know what you are doing because if you don’t, you could end up losing money.
My experience affords me the opportunity to help teach and guide people through all aspects of investing in real estate.
Over my 36 years of investing, I have worked with hundreds of service providers, trades people, licensed and non-licensed contractors, private/hard money lenders, institutional lenders, commercial and residential builders and developers. I have also worked extensively in the residential and commercial real estate arenas.
While I have done real estate transactions in many states, my primary area of interest and choice is Arizona. I live here, work here and play here.
As my dear friend Les Brown says, “That’s my story and I’m sticking to it.”