Criteria for hard money - Posted by Mike Daly (GA)

Posted by Jim Kennedy - Houston, TX on April 12, 2002 at 01:55:40:

Clair,

I can’t speak for other markets, but in my area there are several “real” hard money lenders who make their lending decision based on the asset vs. the borrower’s credit. On the other hand, the majority of those in my area who represent themselves as hard money lenders, are what I think of as “quasi” hard money lenders. In other words, they offer the benefits outlined in Beckman’s article, but they do use the borrower’s credit while evaluating their willingness to make the loan.

Hopefully, you’ll be able to search for and find the “real” hard money lenders in your market.

Best of Success!!

Jim Kennedy,
Houston, TX

Criteria for hard money - Posted by Mike Daly (GA)

Posted by Mike Daly (GA) on April 10, 2002 at 19:51:39:

Interesting article on hard money lenders.

New Criteria for Hard Money
by Bob Beckman

Not a week goes by that I don’t read the following
refrain on some real estate investing web site: “Where
are all of the real hard money lenders?” As an active
hard money lender, and knowing others who do this
around the country, this always amuses me.

It has become apparent over the years that there is an
ongoing debate about the services that a hard money
lender should offer and what criteria is warranted,
and in most instances necessary, for both lender and
borrower.

In this article, I hope to explain the changes that
have taken place over the years in this important
relationship and what to look for with regard to hard
money lenders.

First I would like to address a prevalent myth. Hard
money does not necessarily imply that the loan is based
solely on the equity of the property in question. This
is a very common misunderstanding.

Many years ago, private lenders (hard money lenders),
used the actual property as its own collateral. If the
borrower paid them back, that was great, but if there
was ever a default situation, that would be fine too.
The lender always loaned far less on the property than
the fair market value so in the long run a lender stood
to make an even greater profit by foreclosing on the
property and selling it.

You may wonder how this has changed. After all, no
hard money lender will lend more than 65%-70% of the
after repair value on a property, and the high fees
and interest rate should more than compensate them
for any inconveniences. So what’s the problem? Why
is it so hard to find private lenders who don’t ask
for credit information? Why won’t they all do "no-doc"
loans? Where are the “real” hard money lenders?

Well investors, here’s something you may have not
considered. Years ago, most states were “non-judicial
states”, meaning that the foreclosure process was simple,
fast, inexpensive, and didn’t involve an involved court
fight. The burden of proof, in many cases, was on the
defaulter. Under these laws, it made sense for the lender
to bypass the credit and pay history of the borrower.
Either way, their investment was sound.

What happened? Consumer protection laws and other factors
have slowly changed most states into “judicial states”.
The burden of proof for the foreclosure process has changed.

To further complicate matters, if the borrower (the real
estate investor) rented out the property, the lender would
be screwed because of current squatter’s laws. In these
instances, the lender has to go through an expensive and
time-consuming court procedure. Even though the lender
will get the house in the end, the expense and effort
has killed the investment.

If this happened often, it would drive them out of business.
In many cases, this is what happened over the years to most
of the equity-only based hard money lenders. This is why
most of today’s hard money lenders will check credit scores
and, in most instances, ask for further documentation such
as tax returns, bank statements, etc.

I find that Rehab Funding, as well as most private lenders,
are much easier to deal with, much more streamlined, and
have far less red tape than a bank or lending institution.
The only difference from those “good old days” is that
today we are more careful about dealing with “anyone who
can fog a mirror”.

Speaking for myself, when I work with a real estate investor,
I want the legal option to foreclose, but I want to know that
the history of the borrower indicates that this is highly
unlikely.

So, if hard money lenders insist on checking credit, what
good are they? Let me start with the obvious: most banks
and lending institutions don’t want to touch rehab projects.
In stark contrast, this is our specialty (acquisition and
repair money for rehab projects).

Consider this: if you find a bank willing to do a deal with
you, will they require a down payment? If you are buying a
property for $50,000, and they require a 20% down payment,
that’s $10,000 out of pocket at the settlement table, and
this does not include standard closing fees, which are extra.

A hard money lender like Rehab Funding requires no down
payment. Also, no bank or lending institution that WOULD
do this type of loan would fund 100% of the acquisition
cost AND 100% of the repair costs. If you buy the property
for the right price (using Cameron Dunlap’s or Rehab F
unding’s formula for buying properties) that’s exactly
what we CAN do.

Another huge advantage of hard money is quick loan
turn-around. If you are bidding on a foreclosure property,
an estate sale, or any property from a motivated seller,
your ability to move fast will often determine your
ability to “steal” a property. Banks will normally take
thirty to sixty days to close. This will rob you of your
competitive edge. Rehab Funding and most private money
sources can close within two weeks. That’s a BIG advantage
to have when bidding on a property!

Beware of pre-payment penalties! As a real estate investor,
you should never deal with a loan that includes such a penalty.
The faster you work, the more your investment will pay off.
Always remember that each day you will be paying interest,
taxes, insurance, utilities, and contractors. This comes
right off your bottom line, so all of your energy should
go into flipping the property or finishing and refinancing
it as soon as possible.

Why would you ever want a loan that penalizes you for
finishing quickly? Rehab Funding has never charged pre-payment
penalties and we WILL never do so. We also have no "seasoning"
issues.

Finally, you should know the other advantages come with a hard
money loan that are not available elsewhere. For instance, Rehab
Funding has a Six Month-No Pay Plan for investors with strong
credit. Those of you who have worked on properties know how
difficult cash flow can be to manage. This plan alleviates
this problem, and only a hard money lender who deals with
real estate investors day-in and day-out will provide such a
great program.

The bottom line is this: don’t use hard money because “they
don’t care about your credit”. Use hard money because our
programs are designed to maximize your profits as a real
estate investor.

Bob Beckman is the president of Rehab Funding
To learn more go to http://www.rehabfunding.com

A Possible Compromise - Posted by J. Clifton

Posted by J. Clifton on April 11, 2002 at 21:20:49:

One little problem with this entire post is that the national, long-established and prevalent definition of hard money (loan based on equity only) has been consistent, whether the state in question has been non-judicial OR judicial, and whether its housing laws were pro-tenant or not. What may have really happenned is that 1) FICO scoring came along, making hard lenders envious of the ease at which comforming lenders can efficiently cream-skim for the top 10% borrowers (and thus “objectively” justify jacking up the rates on everybody else); and 2) certain hard lenders simply do not like how investors have helped to better educate the public.

One traditional attraction for becoming a hard lender was the impression that the typical problem-credit customer had “no where else to go” to escape rate gouging loans. Investor sites like this have informed borrowers with equity that there are logical alternatives (private lenders, created notes, etc.) to accepting the extremely one-sided risk management structure (all profit/zero risk profit center) that some hard lenders want to offer. What some of them seem to want are the pure “no-back-talk” days of total control over last-resort borrowers.

One possible compromise to address the concerns raised about snags in foreclosing, or in removing squatters, could be for investors to offer to take title to their properties in land trust and lend in the form of a personal loan against the beneficial interest, backed by a UCC-1. The UCC loan would allow for rapid cure of default, and if other investor documentation is in place, it would allow for rapid ejectment of the occupant.

If investors offer an ALTERNATIVE way to handle the default cure and squatter problem that is EQUALLY protective of the lender’s interest, reasonable hard money lenders should be able to do the doggone loan without a credit check. So the question becomes, are these ‘equity-plus’ lenders operating in good faith, or are they using the above concerns as a figleaf to justify misusing the term “hard money?”

my two cents - Posted by Brian M. Powers(MI)

Posted by Brian M. Powers(MI) on April 10, 2002 at 23:28:45:

point well taken…but bob beckman and others simply want to be able to charge hard money rates and oh by the way you also have to have a credit score that qualifies for a conforming loan or close to it.
if i am sitting on a 700 credit score, asking for a 65% LTV loan and you think you’re going to get 16% interest and 7 point fees then i don’t even take you serious.
i’ll find a partner with private money and give him a much better return on his money and create a better situation for myself.
BMP

i wasn’t trying to… - Posted by Brian M. Powers(MI)

Posted by Brian M. Powers(MI) on April 11, 2002 at 14:33:42:

knock the bob beckmans or those who have less than desireable credit. i am simply saying if you are going to call yourself a hard money lender, than be a hard money lender. don’t ask people to be conforming qualifiers and then gouge them with hard money rates and fees.
hard money lenders, true hard money lenders that is, serve a purpose and fill a need for investors…i am not trying to demean what they do.
BMP

Re: my two cents - Posted by matt

Posted by matt on April 11, 2002 at 13:10:06:

Brian,

The other instance that a private lender may be helpful is if you do not have the cash to “go in” with a partner. Someone may have a high credit score but may not have the cash to put into the deal, even with a partner.

Regards,
Matt

Re: my two cents - Posted by CLAIR_MO

Posted by CLAIR_MO on April 11, 2002 at 09:33:56:

I’m not putting down Bob Beckman or any of the hard money lenders who requires a good credit score to get a loan. I’m wondering, are there any hard money lenders who do not require good credit score and will lend to someone who are trying to improve their credit-worthliness?

Re: my two cents - Posted by James Harris

Posted by James Harris on April 11, 2002 at 09:09:03:

Brian, It appears to me that you are possibly saying the same thing that Bob was saying. Typically if someone like yourself, has the credit, possibly find an investor that will lend like a hard money, Thaat can be a dream come true. However, some of us do not have a 700 credit score cannot do the things that you high score people can do. So a hard money lender is very helpful.