Like many newcomers to real estate investing, when I was starting out, my biggest issue was getting financing. I wasn’t confident enough in my investing abilities to take major risks with my own money, and I couldn’t get much capital from my bank or my partners without ruining my credit. And, I still didn’t have enough cash on hand to pay for both the cost of a property and the expenses associated with repairs even with the help of the financing I had at the time.
So, for a while, I resigned myself to a slow flow of small deals that were within my financial constraints. As it turns out, I should have dived into taking out hard money fix and flip loans from the start if I wanted to grow my capital.
While it’s true that it’s a bit scary to take out a loan that you won’t be able to pay off until you successfully sell a property for significantly more than you purchased it for, I’m here to tell you that you can and should consider it. Having the option to use hard money will open up a new world of possible deals, and it’ll enable you to scale your real estate investing business to new heights. Let’s explore how and why to get hard money loans so that you can start to unlock more of your investing potential.
What Are Hard Money Fix and Flip Loans?
In case you’re not familiar, hard money loans are loans that are secured with the borrower’s equity in a property. So, if the borrower defaults on their debt, the lender is empowered to seize their portion of the equity to recoup their losses on the missing interest payments.
Hard money loans are powerful tools for real estate investors because they allow for relatively low-risk lending or borrowing of significant sums of money.
Since control of the real estate’s equity is effectively held by lenders until the loan is fully paid off, there’s little need to vet the finances of borrowers. And, because borrowers are usually looking to renovate the property and then quickly sell it for a higher price than they paid when they bought it, hard money loans can be closed out rapidly.
If everything goes well, lenders get their capital back with a hearty premium, and borrowers get to make deals much larger than they’d have the money for when going it alone.
Unlike mortgages, credit lines, or other types of financing for real estate investing, banks and traditional financial institutions typically don’t offer hard money loans. Instead, private lenders are the loan originators. Lenders can be individuals, partnerships, or companies, but no matter how they’re organized, most of the time lenders are experienced real estate investors. That means having a good relationship with a reputable and fair hard money lender is one of the best assets that a new investor can have.
Hard money fix and flip loans provide for the expected costs of renovations to a home as well as the up-front cost of buying it. So, borrowers barely need any starting capital, as they’ll get funding for the property and future repairs at the same time. Getting additional cash for renovations isn’t usually required when you borrow hard money, but it’s very convenient for many investors.
You should be on your guard for exploitative terms with hard money loans, however. Your protections as a borrower aren’t going to be very strong, and it’s important to recognize that lenders will get the most out of a deal if you default on the loan towards the very end of the renovations process.
The last thing to know about hard money loans is that they tend to be one of the last lines of financing for investors. After all, if you have enough capital or unsecured financing to buy and renovate a house on your own, there’s little reason to pay interest to a hard money lender. Still, in practice, hard money loans are a reasonable and very common way to scale your deal flow beyond what your creditworthiness or liquid capital would otherwise support.
How To Know If You Qualify for a Hard Money Loan
If you don’t meet lenders’ requirements for taking out a fix and flip loan, you’re likely to find out at the worst possible time: when you immediately need money to close a deal. The good news is that you can plan ahead and figure out if you’re going to qualify.
In general, you’ll qualify for a hard money fix and flip loan even if your credit score is poor or your company is short on liquid assets. Most of the time, you’ll be responsible for between 10% and 20% of the price of a property and the costs of renovation, and your lender will pick up the rest. If your lines of credit and soft money financing are both maxed out, it shouldn’t negatively impact your chances of getting approved for a hard money loan.
The key thing to remember is that if you don’t have significant collateral to offer to the lender in exchange for the funding, you won’t qualify.
That means when you’re looking to get a hard money loan, you’ll need to have the home in question under contract to prevent other buyers from putting in an offer and eating your lunch. If you don’t legally control the right to purchase the property in question within 30 days, you won’t be able to trade that control to a risk-averse hard money lender to secure the loan and close the deal.
The final potential barrier to qualifying for a hard money fix and flip loan is that you will need to be willing to accept the lender’s terms, which may be less-than-favorable. Because there isn’t much regulation about what a hard money lender can ask of borrowers, you may need to fork over some of your future profit from the flip. It’s also possible that your lender will ask you to use their contracting or appraisal staff to ensure that costs are kept within their control.
What To Do Before Applying
If you want to get your hard money fix and flip loan approved in a timely fashion, you’ll need to be prepared while you’re prospecting for leads.
That means understanding who your private lender is likely to be, their average loan amount, the rate of interest they’re likely to charge, and any other terms they may insist on. Of course, you’ll also need to have a working budget for your operations and a full accounting of your cash on hand as well as your other financing options.
After you’ve pinned down those details, you can examine leads for properties with fresh eyes and an action plan.
Hunting for homes that are priced right at your lender’s average hard money loan amount will ensure that you only go to them with deals that they would realistically take. Once you’ve found a house that fits the bill, you’ll need to:
- Perform an in-depth valuation of the property.
- Estimate renovation costs.
- Estimate the after repair value (ARV).
- Calculate your expected profit margin from the sale of the renovated property before financing costs.
- Prepare a deal information packet for potential lenders containing all of the above information (if necessary).
- Calculate the expected cost of a hard money loan.
- Calculate your expected profit margin from the sale after financing costs.
If I had to emphasize one thing about these steps, it’s that you absolutely must do them before you put a home under contract and start to move forward with a deal.
Planning for Hard Money Financing
Your hard money fix and flip loan is likely going to be the centerpiece of your financing plan, and it will dramatically influence the prospects of the entire project succeeding or failing. You need to have a strong understanding of all of the potential costs if you’re going to reliably make a profit. It’ll also partially determine your time constraints for the renovation and resale process.
Property valuation is one more thing you can’t bungle when you’re preparing to apply for a hard money loan. If you’re willing to pay the sticker price for an overvalued property, lenders aren’t going to want to pony up the cash you need to close the deal, as the asset they’ll be getting as collateral will be less likely to be worth as much as you need them to pay. In contrast, if you’re skilled at identifying highly undervalued properties, you might get more attractive interest rates from hard money lenders, as your chances of making a profitable flip will be much larger.
The last thing to remember is that if you plan on cruising for homes at a foreclosure auction, you’ll need to be ready to move quickly and have a good understanding of how much funding you can realistically get while you’re bidding. So, always plan ahead for your hard money fix and flip loan borrowing before applying, and plan meticulously.
If all this sounds quite intimidating, don’t sweat it.
After you have your first winning hard-money-financed deal in your pocket, the entire planning process will become second nature. In the run-up to your first deal, I highly recommend setting up a budgeting and deal evaluation spreadsheet to keep track of your expected costs and margins. Everything gets a lot clearer when you can see all the information on one page.
How To Apply for a Hard Money Fix and Flip Loan
Now that you’ve completed the planning routine, it’s time to go through the actual application process. Thankfully, the act of applying for a hard money fix and flip loan is much easier than identifying lucrative properties and figuring out if they’re worth renovating.
In short, you’ll need to:
- Put a property under contract.
- Talk with a loan officer.
- Fill out the loan application.
- Wait while the underwriter and loan officer consider your application.
- Get a third-party appraisal of the property (if necessary).
- Provide supporting documentation about the property or your business (if necessary).
I’m of the view that the more digitized the entire application process is, the easier it is for borrowers to navigate. But, you may find that some private lenders require you to actually submit paperwork in the mail, which tends to add a bit of a delay to the entire process.
Either way, you should be prepared to show your work to your lender. While you may not need to describe your valuation or the expected costs and profits all of the time, your lender will doubtlessly be making calculations of their own for every element of the deal—except for how much profit you’ll be making when everything is said and done, that is.
If you’re working with a hard money lender that you have a strong working relationship with, you might even ask to compare notes.
Getting Your Funds
After you’ve passed everything off to your lender, they’ll likely come back to you with an offer for financing and the terms that they will demand in exchange.
Scrutinize the terms carefully to make sure that the interest rate is consistent with your estimations. And, don’t forget to look for any wild cards that could eat into your profit margin or allow the lender to invoke their right to seize your equity. With a hard money loan, you typically won’t have much leverage to ask for changes to the terms, but if you find something particularly troublesome, it can be worth trying to negotiate.
If everything looks to be in order and you’re happy with the terms, sign on the dotted line and move forward with the loan.
Assuming that the lender has agreed to your request for funds, hard money fix and flip loans tend to take around 10 days to move from origination to disbursal into a bank account or to property sellers.
In some cases, the funds can be ready for use within 48 hours, though that’s far more common when you’re pre-qualified for hard money borrowing and working with a lender that you have a regular relationship with.
Get Pre-Qualified to Avoid Snags
Especially if you plan on doing a lot of deals at the same time, it’s essential to have a hard money fix and flip loan lender that moves at your pace.
Getting pre-qualified by a lender can go a long way towards cutting down on dead time and enable you to go big on your deal flow. But, the requirements for getting pre-qualified vary significantly from lender to lender, and it can be quite hard to get your foot in the door with the leading nationwide lenders.
So, for new real estate investors, becoming a HomeVestors® franchisee is a great way to get reliable and rapid access to hard money fix and flip loans. Franchisees can become pre-qualified and apply for financing in the online HomeVestors portal, massively reducing turnaround time. And, HomeVestors franchisees will get the training and mentorship that investors need in order to use all of the available financing options as effectively as possible.
Plus, HomeVestors franchisees get access to sophisticated valuation software which will help them to identify properties that are ripe for purchasing and renovating with the help of hard money fix and flip loans. While there’s never any guarantee of making a profit on a hard money-financed deal, with HomeVestors you’ll have a fighting chance even in highly competitive markets.
If you’re ready to take the next step, request information about becoming a franchisee today.
Each franchise office is independently owned and operated.