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These days, getting funding for your handyman specials from hard money lenders are getting harder as their requirements become more rigid. Traditionally, getting funding from these private lenders was almost as swift as their speed of driving by the property involved in the deal for inspection.  At the present real estate climate, however, many of these lenders may check on the tax returns, bank statements and current pay slips of borrowers. For this reason, some REI’s may be seeking for other financial fountainheads to fund their deals. Usually in their search for alternative source, they give Federal Housing Administration’s 203K loans the brush-off.

Giving 203K Loans A Second Thought

Ever since the Department of Housing and Urban Development set down the moratorium on investor involvement in the 203k Rehabilitation Program, ethical REI’s avoid this loan program lest they be charged of mortgage fraud. But hold your horses! There can be some ways you can benefit from this financial reservoir.

3 Ways on How REI’s Can Dip Into The Financial Reservoir of 203K Loans

Despite the exclusion of investors to avail of 203k loans, it does not necessarily mean that you cannot use it to your advantage. It just takes a matter of expanding your context and thinking outside the box. Below are some ideas. You may be able to think of more.

1. This will not apply to all but will serve well for REI’s who are looking into buying and doing up their own homes. Well, this scenario is obvious. This is also applicable to REI’s who just recently bought their place of residence. It is expressed in the program that homebuyers who bought their property with cash within six months may refinance the house by availing of the 203k loan. It is as if the homebuyer bought the house through the said loan. If you are a recent homebuyer, you can claim a cash refund which is net of down payment and the closing cost that goes with obtaining a 203k loan. And presto! You can use the cash-back to fund one of your rehab projects.

2. Some resourceful REI’s also suggest to work around the provision that says that the loan can be utilized to refashion a single-family home into a double-, triple, or quadruple-family building. It is not clear whether these newly converted units can be rented out to tenants or not. A residential property which is also secondarily used for commercial purposes is also eligible for this loan. However, the commercial purposes seem to imply an office or store. In this case, it was not clear whether the owner must be the one occupying the commercial space or it can be rented out to other businesses. Probably, this may only apply to non-profit institutions which are also eligible for 203k loans. It is best to clarify these issues to avoid trouble.

3. This is applicable to any REI and is more of a “selling”, rather than a “buying”, strategy. You do not directly apply for a 203k loan so that you can buy and rehab the property, but you can help your buyer to avail of the government financing. As a consequence, you get to sell your property and you are freed from the trouble of rehabbing the property. It is akin to the ethical house flipping. Just make sure that you do not overprice and your buyer really has the wherewithal to pay back the mortgage. Your buyer gets to choose the color of the carpet and the paint and all other personal preferences he may have for his new dwelling. This means that you satisfy your buyer and with this, you could possibly get a referral to another homebuyer for your other fixer-uppers.

The Hurdles of 203K Loans

As with other government and bank loans, leveraging on this loan will encumber you with the red tape that rarely exist when dealing with private lenders, although it charges lower interest rates. The extra paperwork can snatch your time and speed in doing things so it would be great if you do not source financing from 203k loans often.

If you are running low on funds but have plenty of time to allocate for the processing of 203k loans, then you can consider the ways mentioned above on how you can use it for your REI business.

Avalanche of Money Lenders Replaces Customary Lunch with Private Investors

Luncheons with a coterie of investors with deep pockets used to be the avenue that lead real estate investors to the Land of Ready Cash. Today, however, more and more private lending companies are purveying rehab loans to rehabbers and real estate investors who want to renovate their rental properties. The government is also offering rehab funding with terms and conditions varying from city to city.

A real estate investor does not have to go far to look for a rehab loan. Skipping the need for leafing through the menu of the restaurant where private investors’ money were used to be raised, a cash-hungry real estate investor can instead browse the Internet for a list of lenders for this kind of loan. For the newbie, however, selecting the lenders to transact with could be overwhelming.

What Do You Need The Money For?

When deciding on which type or source of rehab loan to choose, keep in mind your purpose of your loan. Are you about to buy a handyman special or bid on a foreclosure? Do you plan to do up a rental property? Would you be willing to rent out your property to low income families? Do you need the cash immediately? Look for the kind of rehab loans that best suit your needs.

Where To Get Rehab Funding?

Banks. Most banks and lending companies shy away from rehab projects. Some local banks may offer rehab funding but the red tape, sluggish rate of approval and high credit rating requirements that go with bank loans often discourage real estate investors from seeking funding from these institutions. If you are looking to buy a handyman special, you may want to look for other sources of rehab loans that can provide you with faster funding.

Government Grants for Rental Rehabilitation Programs. This is for the socially responsible landlord who is willing to rent out affordable, decent, safe and clean housing for low income families. If your property is located within the given city boundaries and could accommodate at least 10 families, then you may apply for this forgivable deferred loan which funds up to 50% of the total cost of renovation. Other certain conditions you must agree with include renting out the rehabilitated property to tenants below 60% median income, setting maximum rental rates per unit, annual reporting of tenant income and other rental information, and organizing the annual maintenance inspections to be done by the city. Owner occupied units are not included in this program. Provisions for this type of program may vary from city to city.

Private Investors/Hard Money Lenders. This type of lenders still remains to be the fastest source of funding for real estate investors. They can lend you 100% of the acquisition, rehab and closing costs, they require less paperwork and more lenient about your credit rating. However, these conveniences come with a dear price tag. Be prepared to pay at least 15% interest and at least 10 points or 10% fee which is added to the amount loaned. This is suited for real estate investors dealing with a motivated seller or bidding on a foreclosure or estate sale, since the ability to move quickly is of the essence here. Just make sure you have done your due diligence.

With many competing hard money lenders springing up, some have refined their terms into more borrower-friendly provisions. It is better for you to obtain financial sources that do not exact prepayment penalties. Not only are they expensive, they may also hamper your momentum for moving quickly. If you have a good credit standing, opt for private lenders who offer real estate investor-friendly programs such as the “6-Month No-Pay Plan.”

So, which source of rehab funding will you be turning to?

If banks are your only source of funding for your real estate deals, then you must be moving slow and missing on great real estate deals. A fledgling real estate investor may do well if he includes in his network a number of hard money lenders. These are private lenders, who could be private individuals or lending companies, who provide short-term loans to fund real estate deals. The loan amount granted will depend on the value of the property in question, which is also put up as collateral. Despite their appellation, they can, in several ways, make a real estate investor’s life easy.

Hard Money Lenders for the Fast and the Serious

In real estate investing, it pays to move fast. And the fuel to your speed is liquidity. If cash is at your fingertips, you can attract great real estate deals. When acquiring a property, you can negotiate a lower asking price if you can pay in cash. This translates to a bigger profit margin or you can opt to sell the property at a lower price for a faster exit strategy.

If you are really serious with real estate investing, you must develop good business relations with hard money lenders because they can supply you with cash faster than banks do and they do not fuss about your credit rating. When applying for a bank loan, you will have to wait for 30 days or more for approval. That is, if you scored well with FICO. But when dealing with people in the hard money lending business, you will be counting fewer days, perhaps hours, if you have successfully tempered your relationship with them with a solid track record.

What Makes Hard Money Lenders Hard?

Now that we have seen their “soft” side, let us examine another side of them that makes them worthy of their name. Hard money lenders face greater risk than banks because they do not screen borrowers according to traditional credit guidelines, such as asking for income verification. This means they come up against higher default rates. For this reason, they charge higher interest rates which usually range from 12% to 20% per annum, with terms lasting six months to a few years.

To mitigate this risk, people involved with hard money lending usually require that the real estate loaned on be used as collateral. In some cases, however, the other assets of the borrower may be included as collateral to be able to obtain a larger amount. Hard money lenders typically base the amount they lend on the “Loan To Value Ratio.” A common figure would be 70% of the After Repair Value of the property. For instance, if the After Repair Value of the property is $100,000, the borrower gets to loan $70,000. Should he want to loan a larger amount, he can present other properties to add as collateral.

Hard money lenders may also charge closing fees which could range from 2 to 10% of the mortgage amount. They may also demand hefty prepayment penalties. So think again before deciding to pay your loan in advance.

While early hard money lenders protect their assets by just inspecting the property in question, a number of them today may ask for credit application that may probe about your tax returns, bank statements and current pay slips.

You may have noticed that hard money lenders are soft while borrowers are in the process of borrowing. But once you mess up with your payments, that is when they live up to their name. So make sure to correctly do your numbers before getting a hard money loan to avoid a hard time with hard money lenders.

Have you had any experience with hard money lenders? Tell us about it.

Short-Term Loans

Hard Money Lender

A hard money lender makes short-term loans based on the value of an asset, in this case a property, with little regard to the borrower’s credit and/or finances.  Hard money lenders charge higher interest rates than standard banks due to the high risk nature of these loans.  Unlike traditional banks, hard money lenders can provide funds quickly, usually in 10-14 days, to purchase and rehab distressed properties.  These properties can be in need of significant repairs or be in various stages of foreclosure. This makes these loans popular with first time real estate investors that have little working capital or poor credit scores.  Look to use hard money loans to rehab foreclosures as your means to purchase and rehab your first couple properties.

Rehabber Loans

Hard money lenders will only provide loan terms of 4 – 6 months at which time the investor has to sell or refinance the property.  It is EXTREMELY important that the first time rehabber have a rock solid exit strategy, otherwise his rehab investments will soon belong to the lender.  Not having a SOLID exit strategy is the biggest and most common mistake that a newbie home flipper can make when utilizing hard money.  If this happens to you, work with your lender to get at least a 6 month extension and ask them for referrals to end-lenders that specialize in refinancing these situations.

In order to refi the hard money loan, you will need to find an investor friendly lender that has no seasoning requirements and will appraise the property in its newly remodeled condition and not at its most recent sale price.  Also, do not list the property on the MLS (multiple listing service) if you are planning to refinance.  Lenders will not refinance a property that is currently for sale.  The bottom line is that you either have to have the property pre-sold pending completion of repairs or have guaranteed refinancing in place.  Otherwise, you are setting yourself up for failure.

A typical hard money lender will lend up to 65-70% of the after repaired valve (ARV) of a distressed property.  The ARV is calculated by the lender’s appraiser and is based on an expedited sale scenario in case the lender has to foreclose on the property and resell quickly.  This gives the lender the safety margin needed to minimize their losses when things turn sour.

100% of Rehab Funds

The lender will typically provide 100% of the rehab funds needed to make the property saleable or rentable as detailed in your rehab estimate that you will provide to the lender.  This rehab estimate needs to correctly address the rehab plan in its entirety.  It is very difficult and time consuming to ask for more money in the middle of a project because you missed something in your initial estimate.  It often makes more sense to fund that portion out of your own pocket if possible.  Otherwise you most likely will be waiting for another appraisal and/or underwriting (or committee) approval for the additional funds.

The rehab funds will disburse in 3 – 4 draws as work is completed throughout the project.  Most hard money lenders will not issue your first draw until a portion of the home rehab has been completed.  Work with your contractor to have him put up the initial money to start the project.  If your contractor refuses or says he has no money then you shouldn’t be using him in the first place if he is that poor.  Be wary of giving unknown or untested contactors money upfront in order to start construction.  You will get burned eventually.

High Interest Rates

Depending on the lender, the down payment will vary from 0 – 10% of the purchase price and the origination points will also vary from 0-10% of the purchase price.  Interest rates will typically vary from 13 – 18% and will be charged on a monthly basis on your outstanding balance (only the money you have actually used).

Hard Money Loan

Hard money lenders vary greatly so the newbie rehab investor must shop around to find the best programs out there.  Local rehab clubs and real estate investment groups are a great source for finding hard money lenders you can trust.  Be wary of unscrupulous private money lenders and expert real estate investors that drive themselves around in their own limos.  This may sound funny, but you wouldn’t believe how many crazy people are out there.  Stay away!

I have personally purchased HUD foreclosures with only $500 out of my pocket using a hard money lender to finance the whole project including all closing costs.  Once you have some cash in your pocket, look for cheaper ways to finance your deals.  Community reinvestment banks are who you need to develop relationships with next.

Example of Hard Money Financing:

After Repaired Value (ARV) is $90K

70% of the ARV is $63,000.

As long as the total loan amount is less than $63,000 the deal will work.

Bank foreclosure (REO) purchased for $25K

Rehab Estimate is $30K

10% down payment on purchase price is $2,500

4% origination is $1,000

Closing, attorney, insurance, titles fees – $2,000

Total loan amount in this case would be $55,500 (assuming the lender rolls in closing costs and points).  This deal will work every time.

Note: Remember to subtract your down payment from the calculation of the loan amount.  Depending on the tax pro-rations (in most states the seller has to give you the prorated amount for the current year’s taxes) you may not have to bring the full down payment to the closing table.

Related articles

• What you must do PRIOR to Obtaining a Hard Money Loan

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Smart investors will get pre-approved to refinance their hard money loan prior to obtaining the loan!  Hard money lenders are not in the business of lending their money for the long term.  They will not refinance your project once complete.  Even if the plan is to sell the property for a handsome profit, one never knows what may happen so be prepared to deal with any scenario.

Rehab finance is not a topic that every mortgage broker or banker is familiar with.  I have learned this lesson the hard way and almost lost a property due not being able to find a suitable end lender for my first rehab project.  Especially in today’s difficult financial and real estate market, the rehab investor MUST have a solid exit strategy when using short term loans.

I once thought that if I bought a property at large enough discount that the profits would take care of themselves.  I learned that finding foreclosures at dirt cheap prices is not as difficult as actually selling the finished product for profit.

Most new real estate investors have little money to start with and will get into the rehab business to fix and flip foreclosures for quick cash.   Using hard money is an excellent way to get started, but make sure to understand the rules of the game.  There no such thing as a sure sale in this industry anymore, so one must be ready to refinance and rent out the home if a sale is not possible.

Here are the key issues that must be discussed when looking for an end lender that can refinance a hard money loan:

• Make it clear that you are trying to refinance a property that you have owned for less than a year.  Most banks have seasoning requirements of one year prior to obtaining a cash out refinance.

• Do not list your property on the MLS (multiple listing service) while you are trying to refinance your project.  Banks do not like to refinance properties that are currently for sale.

• Make it clear that you have rehabbed the property and that you need an appraisal based on the improvements made.  Most refinance programs will only want to value your rehabbed home at the most recent sale price if has been less than a year since your purchase.

• Understand how much cash in reserves you must show in order to refinance.  Most banks are requiring 6 months in reserves for mortgage payments, taxes, and insurance.

• Most banks will only consider 75% of the rental income when calculating your debt to income ratios.

• Find out what is minimum credit score needed for your refi situation – these requirements have gone up substantially.

• Find out exactly what proof of income and assets will be required.

Always be 100% upfront with these and all other items regarding the loan.

Banks have been tightening their lending guidelines and policies and unfortunately the easy money programs have all been eliminated.  This makes it all the more important to develop a relationship with an investor friendly community bank that caters to real estate investors and rehabbers.

Related articles

• Why Use Private Money for Your Rehab Financing Needs?

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For investors with little to no cash to start with, hard money loans should be considered as the first financing option for buying and fixing foreclosures.  Looking for private investors at the beginning of one’s rehab investing career is difficult due to the lack of experience and no proven track record which is very important to private lenders.  For those investors with some cash to invest, look to the local community bank in the neighborhood you are planning to do business in for your best lending options.

Not all community banks are the same, but there will usually be at least one bank that is tied into the community with investor friendly programs to rehab realestate in the local community.  Rehabbers provide an important service that commercial builders and large corporations cannot compete with.  Rehabbers keep their overhead low and turn ugly houses into beautiful homes that can be purchased or rented at affordable prices by the community’s local residents.

New construction housing is typically too expensive and cannot compete with the value a smart rehabber can provide.  Remember, the goal is to provide affordable housing for the community, not luxury palaces that no one can afford.  A smart rehabber should be able to sell or rent their finished product at or below market rates and still be profitable.  Never bank on the upper end of home sale prices or rents when analyzing a deal for its potential profit or cash flow.

Some of the best loan programs out there are through the local community banks where most rehabs are occurring.  They are usually more flexible in their terms and are happy to deal with investors that will be improving their communities.  You are looking for the banks that actually keep their loans in house and do not sell them to a third party such as Freddy Mac or Fannie Mae.  This allows the bank to be much more flexible in the terms it can offer and how it treats its investors when issues arise.

Combo Purchase and Rehab Loans

Look for a combo purchase and rehab investor loan that automatically converts to a fixed rate loan amortized over 20 to 30 years.  Expect to put down around 20% of the purchase price as the down payment and pay one to two points in fees (one point is one percent of the purchase price).  The bank will typically charge interest only (at a higher than market rate) during the rehab phase of the project until all work is complete and inspected.  The bank will then AUTIMATICALLY convert the purchase/construction loan to a fixed market rate loan.  During the underwriting process for the combo loan, the bank approves a construction and permanent end loan based on the repairs described in your rehab proposal.  This eliminates the headaches of having to quickly refinance your short term construction loan such as when dealing with hard money lenders.

The rehab funds will usually be issued in three to four draws and interest will be charged on the funds as they are borrowed.  Unlike many hard money lenders, some local community banks actually provide the first rehab draw upfront in order to start the rehab with their money and not your own.  The lower fees and simplicity of these programs will allow you to flip foreclosures for maximum profit or create rental properties that offer immediate positive cash flow.