Fix and flipping is the real estate strategy of finding a undervalued or derelict home, buying it, fixing it up and then selling it for a profit as quickly as possible. Flipping homes can be a very lucrative part time or full time job. It’s not unheard of for someone to see a 20% to 30% ROI in 6 months.
While finding a rundown home at a discounted price and hiring a great contractor referred to you by your network of contacts are both vital parts of executing a successful deal, procuring funding for these types of projects is often a real estate investor’s biggest obstacle.
In this article we navigate the murky world of hard money lenders, otherwise known as private money lenders or bridge lenders.
Why do You Need a Hard Money Lender?
Hard money lenders supply short term financing to real estate investors for different reasons, including 1031 exchanges, inheritance loans, refinances, purchases and fix and flips.
These private money lenders generally lend their own money or manage a pool of funds from different private investors. They differ from a traditional bank loan in that they are primarily concerned with the underlying value of the asset rather than a borrower’s credit score or other financial history.
These loans are especially great for fix and flip investors due to the speed at which they can be funded and the fact that they are designed for short term needs, such as bridging cash flow between the time a house is fixed and and when the house is flipped.
Most lenders can deliver a loan in as little as 5 to 7 days, whereas a traditional bank can take over 30 days. Every bridge lender has different criteria but most will lend at a 60% to 80% loan to value ratio with 100% financing on the rehab costs.
The fact that the fix and flip investor only has to come up with 20% allows them to create leverage. For example on the purchase of a $1 million property the buyer may only need to come up with 200k to make the deal work.
Another advantage to a hard money loan is sellers view an offer from a buyer with hard money lending financing as a stronger offer than a buyer with big bank financing because banks have been known to rescind loans before the close of a deal.
This gives the buyer the ability to quickly close hot deals in the marketplace because the financing process is so much faster.
3 Places to Find a Hard Money Lender
- Use your network whenever applicable. Hard money after all is also known as private money.
Maybe you have a friend, family member or know another investor who has experience using a hard money lender. This should be your first option to secure funding for your deal.
- Ask your real estate broker. Brokers usually have many contacts across the real estate spectrum and can be a great resource for you.
Mortgage brokers are another option but your fees could be 30% to 100% higher than if you are able to find a direct lender.
- Like anything else, hard money lenders can be found using a Google search, but beware of fake Google reviews.
If you read the Google profile of a lender who has 30 perfect reviews with no blemishes, these reviews could be fabricated so always do a full background check if you are not familiar with the company.
The worst place to find a hard money lender is in various real estate Facebook groups, these groups are full of scammers and require no background checks.
Shop around and make sure to get quotes from 3 to 4 different lenders to ensure you are getting a fair deal. Remember that “hard money” is really just “private money” that is secured by a hard asset. So reaching out to people in your network can be a great way to find a private lender.
Things to Lookout For
- The Unicorn Deal
If it seems too good to be true then it probably is. Hard money loans are designed to create short term financial leverage for investors and come at a much higher cost than traditional financing.
In 2020, interest rates for bridge loans currently range from 8% to 13% with a 2 to 4 point fee from the lender (depending on what state your’re in).
Knowing these rates and fees, if a lender from a place like a Facebook group offers you a loan at 6 months with a 5% interest rate and only a 1 point fee, you should be very suspicious.
- Upfront Fees
Scammers that pretend to be lenders may even ask you to pay upfront fees before giving you any of the funds. Reputable lenders will be straightforward about the costs of a loan and generally never have upfront fees. If a lender asks for upfront fees, RUN!
Lenders will usually ask a borrower to pay for an appraisal. Borrowers should wait to use the lender’s appraiser rather than their own appraiser. This is important to avoid paying for the same service multiple times.
- Due Diligence
Lenders generally want the borrower to have prior experience doing fix and flips, usually 3 to 4 deals in the previous 24 months will suffice.
If the lender does not ask for your prior experience or any other questions this should be a huge red flag.
Lenders do not want the hassle of takingpossession of the property if things were to go wrong. They want to see you succeed and therefore will do their due diligence before completing a deal.
Few lenders want to be part of a real estate investor’s first fix and flip, so if they are not verifying the deal and asking you questions about your history and why you are doing what you are doing this could be an indication that they are a scammer.
Hard money is a niche industry and there are not a tonne of big players. As a borrower you should always do your due diligence and understand who you are working with before you sign on the dotted line.
About the Author
Russ Barneson is head of marketing for Crescent Lenders, a private money lender based out of Los Angeles, California which lends on both commercial and residential real estate properties.
He is also the creator of the Hard Money Blog where he discusses all aspects of real estate investing. Russ enjoys traveling, reading, and surfing in his hometown of Pacific Palisades, California.