Real estate investing isn’t for the faint-hearted. There are lots of twists and turns along the way—and, sometimes, what looks like a quick rehab can run into costly delays. That recently happened to my niece, Ava, who ran into renovation troubles with a distressed property she bought. She figured that since she was getting the property for a really good price and it didn’t appear to need much in the way of repairs, she wouldn’t have to take out a big hard money loan.
But, that’s when things went south. The ‘lipstick renovation’ turned into a new foundation, electrical rewiring, and more. Needless to say, Ava needed more money and had little options to get it. To close the gap, she decided to take out a 2nd position hard money loan. That was her next mistake. Here’s why.
Reasons to Avoid Hard Money Lenders in 2nd Position
We all buy distressed houses with the intention of staying on budget with the renovation costs. But, real estate investing isn’t an exact science. Costs can shock you if you didn’t calculate the rehab numbers carefully in the beginning, requiring you to go find additional funding. A 2nd position hard money loan is one way to fill the gap, but it rarely makes sense. Some of the problems you will probably encounter include:
- Accessibility. You are not likely to find too many lenders who are willing to take on the risk of being second in line for repayment. Each state has different foreclosure laws governing how a second lender can recoup their funds when necessary, and, if the laws are not in their favor, you might not find a 2nd position lender at all. And, those that you do find may be less-than-reputable, so be cautious of who you reach out to.
- Qualifying may be difficult. If you do find a reputable hard money lender willing to take on the second position, they are going to want to ensure that your combined loan to value (CLTV) provides enough upside for all parties involved. If you paid too much for the property in the beginning or borrowed too much for the rehab already, you’ve dug yourself a hole that even risk-tolerant lenders won’t help you out of.
- Higher costs. These 2nd position hard money lenders take on more risk than your first-position lender and, to compensate, charge a higher interest rate and other fees. For a primary hard money loan, for instance, you may pay a couple of points but a 2nd position lender may charge upward of five points. The loan can eat away at the potential ROI that you’re trying to salvage pretty quick.
Now, you might have made a mistake and be in the same position as Ava was. You might need that 2nd position hard money loan to try to right yourself. But, it’s a strong signal that your real estate investment strategy needs some work. You don’t want this to happen again because your professional real estate investing career will go down the drain.
Avoid Financial Mistakes By Getting Support
When Ava realized that she needed support to grow her business more smartly, I told her that the best way to get it was by becoming a HomeVestors® franchisee, like me. HomeVestors sets you up to achieve your professional goals with comprehensive one-week training. This is followed by ongoing mentorship by a Development Agent with years of experience in valuing properties and accessing hard money loans.
As a HomeVestors® franchisee, you also get access to some of the best tools in the industry, including ValueChek™, to help you evaluate a property’s rehab costs and after repair value.
And, through HomeVestors’ UGVilleSM platform, hard money lenders compete for your business—not the other way around.
Sure Ava—and you—could continue to go it alone and make even more costly mistakes, but why take on all the risk? Contact HomeVestors today and find out how you can get the support you need.
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