Flipping Houses Using Hard Money Rehab Loans
September 15th, 2007 by fhop29
Hard Money can be a quick way to fund everything from residential property, to industrial facilities, to new home construction. I will not get into every aspect of hard money but I will offer you a general frame work that your brain can grab a hold of.
First of all a majority of hard money lenders will allow you to borrow up to 65% of the value of the home. If the loan is for rehab purposes, they’ll use the “after-repaired value” of the property as the basis point. I have seen, on occasion, that number as high as 75% but 65% is the norm.These loans are very situational and very flexible so there is some wiggle room if the deal works. It may be a strike against you if you are new to the game but fortunately that can usually be offset with adequate reserves and a good plan of action.
Let’s look at an investor rehab loan to see how the numbers work.
Let’s say you come across a beat up old home in a good neighborhood where homes sell for $100,000. The seller walks you through the home and you determine that the property needs around $12,000 in work. You’ve gotten pre-qualified for a rehab loan and know you are wondering what the maximum you should pay for the house.
Lets keep it basic, you want to take $100k x 65% - loan costs – repair costs/holding costs = Purchase price. Loan costs, for hard money loans, run from 8-13% of the total loan amount. They are not inexpensive but it’s less money than you’ll pay to a partner! For now we’ll assume costs of 10% and holding costs of $2,000. Given those numbers, you probably shouldn’t invest more than $45,000 for the property. If you decide to pay more, that just means more money out of your pocket to complete the project.
Here are a few quick tips you can utilize to maximize the likelihood of being approved for hard money loans, in general:
- The more equity in the property after the loan, the better,
- The higher your credit score, even better
- The more credit history you have, the better!
- The more liquid assets you can show that you have personally or have guaranteed access to (lines of credit, partners, rich uncles. . .) the better
- The more populated the area, the better
- The faster the properties in that area sell, the better
- The more solid the appraisal value, the better! A lot of hard money lenders like to use fire sale values as the basis point of the loan so don’t be stunned. This is definitely not the time to use inflated values.
All in all, this is a numbers game. Do not allow yourself to get attached to a property if the numbers don’t benefit you. Hard money lenders can be flexible but present them a deal where the numbers don’t add up and it could cost you a crucial relationship for future investments. Credit doesn’t always matter but it does help, tremendously, if you can show good credit history.
Tags: hard money loans, loans, real estate investing, foreclosure, mortgage, lender
Category: Hard Money Loans | 3 Comments »
