Posted by Ben (NJ) on December 29, 2000 at 19:01:25:
Let’s say you are an investor and locate a property
substantially below appraised value. Say the property legitimately appraises for $100,000 and your offer for $70,000 is accepted. You now turn to a hard money lender who will loan up to 65%, ($65,000). You have only put up $5,000 of your own money. The lender will take a first position mortgage on the property so he is secure that if you default he can foreclose and he will still have a $35,000 equity cushion to make sure he does not lose money. He does not care about your credit rating, etc and can move quickly but you pay for that convenience in rate (12%-18%) and points (5-10),plus you pay all closing costs. If you can fix up the property a little, sell it quickly and get close to market value, you simply pay off the loan and pocket the difference. If you have a really motivated seller, he may even take back a second mortgage for that $5,000 you had to put up. Now you have accomplished the ethereal “no money down” deal. But wait, there’s more…if you really got a bargain on that property, say you got it for $60,000. Theoretically the lender
should still lend you $65,000 and you walk away from closing with $5,000 in your pocket.