Posted by Rik Teaner on August 23, 2005 at 17:18:48:
He is primarily a broker. He also lends a bit of his own capital.
When I said he gets a percent a month, I meant that he gets that for his investors.
My main worry was that I had always thought such a high rate of interest must come together with a high rate of risk, such as second liens etc., but from your replies it seems that it is not necessarily so.
Thanks again for the help.
Is 1% a month possible? - Posted by Rik Teaner
Posted by Rik Teaner on August 22, 2005 at 15:20:57:
I have a friend who claims to be making loans, primarily short term, 3-12 months, and getting a point at close, plus 1% a month.
He also claims that he only does first mortgages, and never finances more than 70% of appraised value.
He’s doing big deals…anywhere from $300,000 to a million-plus.
Can this be? I’ve heard of hard money, and bridge loans, but always assumed they were only on second mortgages, or really risky deals.
And the return sounds too good to be true.
Is there any way this can be true?
And why couldn’t the borrowers just go to the bank and get loans?
These don’t sound like nickel-and-dime borrowers.
I’m interested because he’s looking for more capital, and I can raise some, but don’t want to get scammed.
Any pointers would be greatly appreciated.
Re: Is 1% a month possible? - Posted by John B. Corey Jr.
Posted by John B. Corey Jr. on August 22, 2005 at 17:48:11:
Rik,
Wes covered most of your questions.
Hard money definitely provides such returns while being in 1st. The logic for why someone would use hard money normally comes down to three factors.
A) The borrower does not have the credit to obtain more conventional financing. Real hard money involves no credit checks.
B) The property can not qualify. The existing improvements do not meet code or something similar so conventional financing is not an option.
C) There is a discount for a quick close, all cash deal. Hard money is the same as all cash to the seller and they funds can be delivered quickly. Much quicker then a bank normally operates.
Now, supplying funds for such deals implies that you know what you are doing or that you trust the other person. One way to invest is for the money person to fund a specific deal as and when they happen. The money person would review and approve the deal before the funds are released. Hence they need to understand how to review such a deal.
John Corey
Chelsea Private Equity LLC
Re: Is 1% a month possible? - Posted by wes
Posted by wes on August 22, 2005 at 15:51:18:
Your “friend” must have all the business he cares to handle.
Most Hard Money loans are short term (6-12 months) with the rates usually “starting” at 12% “Interest Only” (1% per month). But, it is common to see them in the high teens.
1 Point to close is the lowest I have ever seen for Hard Money with the average about 3-5 points but commonly over 5 points.
Not sure why you thought Hard Money Loans were second mortgages. They are almost always 1st liens.
While Hard Money might be the only choice for some borrowers that cannot get a bank loan, the ease of getting the loan quickly and with little hassle also makes it useful to more experienced borrowers that could probably go to the bank but for whatever the reason, choose not to do so.
Re: Is 1% a month possible? - Posted by Rik Teaner
Posted by Rik Teaner on August 23, 2005 at 06:49:08:
Thank you, John and Wes.
In this case I do trust the other person, but he prefers that the money people review the deal first.
I have some idea of what i am looking at, but I’m far from an expert.
The money flow is directly from the lender to the borrower, and back.
The dealmaker gets his point at close.
Re: Is 1% a month possible? - Posted by wes
Posted by wes on August 23, 2005 at 08:49:51:
I guess I’m missing something here because things do not seem to completely add up.
You originally said your friend is “making loans” and getting 1 point to close and 1% per month.
That sounds like he is the lender.
Now you are saying “he prefers that the money people review the deal first”. And, “the dealmaker gets his point at close”.
Since I originally stated that 1 point is very low points for a hard money loan, your latest post makes it sound as if your friend is just a broker (which would explain the 1 point to close) and someone else is the actual lender. However, if that is the case, I do not see how your friend gets 1% per month if it is not him lending the money.
Might be just fine, but in my experience, it’s just not exactly the way it is usually done.