Posted by Bill K. (AZ) on December 19, 1999 at 15:58:06:
Here’s some information that I found, not long ago, on hard money lenders. I don’t remember exactly where this came from, but the info is quite useful.
The term “hard money” actually derived itself from the idea that the project is hard to finance, not that the lenders are hard to work with. Hard money lenders loan money to qualified projects quicker than conventional lenders, at a higher rate and speedier time frame than conventional lenders, but the project must make financial sense. The most important factor to a hard money lender is risk of their investment. If the borrower has substantial cash investment in the project (usually 25-35%), then the loan will usually close if the borrower will present the lender with the following:
- Borrower must present to the lender a project description that is clear, concise, realistic, and honest.
- Project must be feasible, have no title or environmental risk, and have a realistic exit strategy. Project profitability must be significant enough to support current and/or back end costs of the loan based upon conservative operating assumptions.
- Borrower must be experienced, cooperative, creative, flexible and confident in their abilities and the feasibility of the project.
- Borrower must not be insistent on terms, and leaves the lender to their own good judgement to make the best possible offer relative to their risk in the project.
- Borrower must be able to comfortably and willingly pay the lenders actual due diligence cost and all closing expenses, includng necessary 3rd party reports.
LTV’s usually range form 50%-65%, but may be up to 80% for purchase or special circumstances. Interest rates generally range from 12% and higher, possibly with equity kickers. Points range from 3-10 points at lenders discretion. Closing costs are paid by the borrower. Due diligence and commitment fees may be 1/3% to 1/2% of the loan amount, and are paid by the borrower. Third-party reports, appraisals, environmentals, and so forth, are paid by the borrower.
Closing of qualified projects may take place in 5-10 days after all documentation is approved by the lender.
Much of this applies to commercial projects. Residential lenders may be less stringent in their requirements, but it gives you an idea of how it all works.
I hope this helps.
Bill K. (AZ)