So what is a hard money lender? Is a hard money loan as easy as getting cash from an investor? What details do you need to know before entering your real estate deal? Local Hard Money Lenders Suzanne Hunn and Dustin Hoog are here to help!
This hard money lending team is here to detail all you need to know about getting a hard money loan. If you want to know about this loan product and how to best prepare for and use one, read on!
Today we are asking these questions:
- What is a hard money lender?
- Why use a hard money lender?
- Does a hard money borrower have to put money down?
- How much time do you need to close on a hard money loan?
- What kind of borrower are you looking for?
- What are the costs of getting a hard money loan?
- How do you find a hard money lender in your area?
- Can you get a hard money loan for rehab costs?
- Why does hard money lending get a bad rap?
- What’s unique about FasterFunds Lending?
- How does a borrower get approved?
- What, if any, experience should a borrower have?
- Do you need an appraisal for a hard money loan?
- What type of property do you look for?
- What’s it like to work with FasterFunds Lending?
- What are some of the benefits of being in the FasterFunds Tribe?
- What should you ask a hard money lender?
- Is hard money the same as private money?
- How do you find and vet a hard money lender?
- Do hard money loans have hidden fees?
1. So, Dustin, can you explain what a hard money lender is?
A hard money lender is what I like to call a “common sense” lender. A hard money loan is a short-term loan that’s asset-based, so we’re lending on the deal—not necessarily everything else that goes into that—for you to acquire either a rental property or a house that you may be rehabbing and flipping.
2. Dustin, why would somebody use a hard money lender versus just going to a bank or their local mortgage broker?
For the ease of it. With most local banks you have to put down 20% to 25% on an investment property loan. When you use hard money, you’re leveraging the hard money lender for quick access to cash because a lot of investment deals, they want to close yesterday, where a bank’s not going to close that quick.
3. So, Suzanne, let me just follow up on both of those a little bit. So do you guys require your borrower to put money down?
It’s totally based on the deal, so as long as they’re buying it right and they’re buying it deep, here at FasterFunds Lending we can lend 100% of the purchase and 100% of the rehab. That’s a huge benefit! There are not banks or mortgage brokers out there doing that.
4. How much time do you need when you actually close on the deal?
If you’re pre-approved, we can get you closed in around three to five business days in our company. You can be that quick. Three to five days from when you got a contract in your hand to when you got your close, money’s in the title company.
5. What’s a typical borrower you guys, and what kind of borrowers are you guys looking for?
We are going to be looking for two types of borrowers: landlords and rehabbers. The landlord that really uses utilizing the BRRRR strategy where they’re buying at a discount, rehabbing and then refinancing out to longer-term financing, or the rehabber that wants to flip properties and doing a lot of the work themselves, or general contracting the work themselves, and has some of his own sweat equity in there as well.
6.Dustin, what are the costs associated with getting a loan from FasterFunds Lending?
It’s a six-month interest-only term. It’s annualized at 12 percent, so that’s one percent a month while the loan’s out, then there’s three percent on the back end of the loan, so when you either sell that property or refinance the longer-term financing, you’ll pay that origination fee at that point. That’s not the standard for the hard money lending industry. I believe most people are a little higher and a lot of them require points upfront, where we prefer to do it on the back end, which makes it easier for the borrower. We’d rather you not have that origination fee coming out of pocket. It’s coming out of the deal, basically on the backside.
7. Suzanne, how would somebody go about finding a hard money lender in their area?
There are a couple of different options. I think the best option is networking and going to your local RIA, asking other rehabbers and landlords that you really look up to who they’re using. You can obviously also search on Google, and you can post on your local real estate investment Facebook page and ask, but I genuinely believe you’ll find the best lenders just by networking and talking to people and asking them who they use and then just start calling them and asking them questions and seeing which program is best for you. Borrower referrals is the top way we find new clients. Our borrowers are big fans of our program and we’ve built the program totally based around them and their experience, so that’s our biggest one.
Second, I would think the RIA that we’re associated with would probably be number two. And, we are big on using social media. You know, I think being loud on social media with Facebook and things like that is always important, and that’s what a lot of people use to ask for referrals, so then it just kind of syndicates from Facebook from there. We use Instagram a little bit; posting on our Instagram page helps us with boosting it out to Facebook and people seeing us on multiple social media platforms.
8. At FasterFunds Lending, would you guys lend any of the rehab money too?
Yeah, absolutely! If you’re buying, it’s all about buying it right. You don’t have to have any money down if you buy it right. Your purchase price, what you buy it for, that’s what tells you if you’re going to make money or not on property. Every lender’s answer will be a little different. A great question to ask the lenders that you’re talking to: “Hey, what percentage will you go up to for the ARV– or, after repair value?”
We loan up to 70-75 percent of the ARV, depending on things like the area and the buyer’s qualifications.
9. Dustin, why does hard money lending get such a bad rap?
I want to say it’s because of the mafia movies. Before I got into the business of hard money, that’s the only thing I knew about it. The reality of it is, real estate investing is an unconventional way of thinking. There’s a lot of parts to investing in real estate. So if the head of it is unconventional, everybody else thinks the rest of it’s unconventional.
10. You both are investors as well. Suzanne, is that normal for lenders?
No, we know the lenders in our market pretty well and– they’re lenders. That’s their realm, that’s kind of the role they play. But for us, I think because deep down, you know, our core is to land on win-win deals. It’s common sense lending where borrowers are going to win and we’re going to win, so us being investors helps out a ton.
For example, I was at a house earlier this week and the borrower had put down a budget of $25, 000, and I walked through the house and I was adding it up in my head and realized the more accurate cost was closer to $50k. So I came back to the office, Dustin and I talked it through, ran numbers on our own. Sure enough, we both got to 50. So I messaged the borrower back and I was like hey, we don’t think this makes sense. You know, our rehab is double, but let me know what you’re thinking. She’s like, well, my contractor hasn’t finished putting the budget together. And then this morning she emailed me and she’s like, “You’re right! Our rehab is $50k. We’re not going to make any money on it.” So we just are always trying to keep an eye out for our borrowers too.
That’s actually a huge benefit to getting money from a hard money lender, versus especially one that’s an investor themselves, versus like, if you go to, you know, your local bank. Are they gonna know anything? They’re probably not even gonna look at the house.
11. Let’s talk about how a borrower gets approved. Dustin, is it difficult to get approved? What’s the process like?
It starts with an online application, then we’re gonna ask for supporting documentation. Supporting documentation is pretty simple. For our company, it’s going to be your last year’s tax returns and your last three months’ bank statements. The reason we want to see bank statements is that we want to make sure that you have some liquidity and reserves.
That’s very important because an investor is going to have this thought of, “The budget’s $50,000,” and you’d be surprised how many times that ends up coming to be $55k to $60k to $65,000 because things go wrong and when things go wrong in the house most times they’re expensive, right? So we want to make sure they have that liquidity in there for when things go wrong. Not if, but when. And we want to make sure it’s going to be a win-win deal. I can’t stress that enough. If you don’t have money to pay your own bills when something goes wrong, you’re probably not going to be able to finish the house and you’re probably not going to be able to win for this. And then you’re going to have a bad experience.
12. Do you care if they’ve rehabbed houses in the past or have experience?
Experience is super helpful. Borrowers who have experience know what they’re doing and we’re naturally going to be a little more excited to work with them. Just because it helps them out a ton. If you’ve already been through a couple flips together, whether it be on your own or with a partner, or you already own a couple of rentals that you’ve already BRRRRed and how to manage, you’re also gonna be more competitive when a wholesaler sends you a deal, or you find your own deal. You’re going to know what a deal is right away and you’re going to lock that under contract immediately. Versus someone who’s newer and doesn’t have as much experience who might be a little slower to pull the trigger there.
We also understand that you have to begin somewhere. If it’s your first time, or you have less experience, we’re gonna talk through that. We might let you know if your proposal isn’t the best deal to start on. Rather than a full rehab, you want or might need it to be a little bit more cosmetic, some flooring, some paint, that kind of thing. We want to get you through this and build up a team while you’re learning at the same time.
13. Suzanne, do you guys get appraisals on all your deals on every property?
So at FasterFunds Lending, I am the appraiser. I go and I walk through every house. I trust myself and our team way better than I trust a random appraiser, because I can go through, and I can see your vision too! I’m going to ask you things like, what types of finishes are you gonna do? So that when we go back and pull comps we can make sure that everything makes sense.
We also have no appraisal fees. Always ask your lenders about fees! There’s always going to be fees associated with a loan, right? You have fees when you get a bank loan, you have fees when you do a hard money loan, but we do not charge an appraisal fee which is a big cost saving to all our borrowers. I walk every property because I want to do the loan. And we want to keep lending and we don’t want to nickel and dime everyone.
14. What are you looking for when you go look at that property that you’re going to lend on?
I’m looking for a few things. First of all, I always look at the structure of the house. I look for things that borrowers might miss: foundation issues, termites, plumbing- like systems that people oftentimes miss and don’t know how to evaluate. And then I want you to tell me what your plan is, because then I can help you hone in on what does and doesn’t make the best sense for the area, and I can help you envision additional things you maybe didn’t think of. You know, there might be ways for you to take this one really large bathroom and make it into a bath and a half to add a lot of extra value to the property. I really want to hear your plan when we look at the property.
15. Dustin, you guys talk a lot about your “tribe.” Can you talk about what a tribe is?
When we refer to our tribe, we mean our repeat borrowers. It becomes a tribe because we’re growing with them. Say they’re going to be growing their business from maybe two rental properties to 35 rental properties in the next four years. We want to be a partner with them.
This tribal feel is important to us because we are understanding that they’re going to go through some growing pains, and we want to create the value and help them go through those growing pains. Because we are local investors ourselves, some of us have been through those growing pains. You don’t need to pay the cost of the mistakes. Let us help you with that.
16. What are some of the benefits of being a member of your tribe?
We have resources that we can share with people that we use ourselves. We’re constantly referring people to the banks that we trust for long-term financing. We have exterior contractors and plumbers. Also, our reliability in getting things done in a timely fashion. And when things go wrong—because a lot of times in an investment deal you don’t have a real estate agent involved, and you’ve never done this before–we’re kind of playing the counselor and the mediator and everything else for our tribe members.
We also know that sometimes just finding the deal can be the hardest thing for people, so helping our borrowers find the right deal is another unique benefit. We’re constantly networking with our internal team that has deals as well as other wholesalers in town. Sometimes borrowers actually stumble upon their own deals but it’s not in their area, it’s not really what they want, so then we can connect other borrowers to help them buy it. Just kind of always focusing on win-win situations all around.
17. Dustin, is there anything else that I didn’t ask you that you wanted to let everybody know about hard money lenders?
I mean, to me, I don’t like the word “hard money.” It’s the easiest money I’ve ever received. Everything’s common sense when it comes to that because it’s based on the asset base. I also want people to know that when you are looking for hard money lenders, I would ask them the question of “how many houses have you taken back?” Because we are a company that doesn’t want to take back the house because that means it’s not a win-win situation. I know there are hard money lenders out there that their goal is to take back that house. That’s not the kind of hard money company you want to deal with. Talk to the ones that have not taken a lot back, right, because there’s going to be a reason for that.
18. Suzanne, what is the difference between a hard money lender and a private lender?
There are three big differences between the two.
1. A hard money lender is a professional business that probably has a team around to support them. This is what they do for a living. They’ve probably got a lot of access to capital. A private lender is going to be typically a friend or a family member who maybe has, you know, $20,000 maybe $100k or $200,000, whatever that number might be for them, to lend out. But, they’re not going to be super familiar necessarily, with the process of providing a loan, that loan paperwork, what title companies need, because that’s not their business.
2. Another difference is that a hard money lender is going to really vet the deal. Do the numbers make sense? Are you going to win on the property? A private lender is probably lending to you just based off of your trust and your character, and they’re probably not gonna know anything about real estate. So they’re gonna say, “Cool, you need you know, $75,000 to purchase this house, that’s what you’re looking for, let me cut you a check.” And you can move on.
3. The third big difference is that your private lender is going to be tapped out on capital. I kind of mentioned that earlier, but they’re going to have a limited resource pool, whereas a hard money lender is going to have a lot more access to funds.
Private money also is typically cheaper, so typically you’re accessing that money at a lower rate than the hard money because the private money individual doesn’t have the overhead that a hard money lender is going to have. So if you want to kind of strategically use those two to lower your cost as much as possible but also be able to do more deals, something that I love to see borrowers do is when they borrow the purchase money from a hard money lender, and then they’re using the private funds to fund the rehab. It’s going to make their private money lender feel a lot safer and it’s going to make the borrower feel safer because they know they’ve had someone quality of vet their deal.
Then, say you combine these resources and still have excess private money left. As they kind of get that rehab started they can go back to the hard money lender and say, “Hey, I’m already halfway through this project, I’ve got another deal and I’ve still got extra resources to pay for another rehab.” You’re able to just scale a lot faster if you’re able to use both those resources.
19. How do you find and vet a hard money lender? What kind of questions would you ask them to decide if they’re a hard money lender you want to work with?
There are a few questions I would ask.
1. As we said earlier, of course, ask what are they lending up to. Most hard money lenders are going to lend up to a certain percentage of the after repair value. So we need to know what that is to make a good deal.
2. What are your fees? What is the cost associated with this loan, because there’s always a cost associated with it.
3. How many houses have you taken back? Because I think that is a huge red flag right there if they’ve taken back so many houses, because that means they’re not lending on the right house. And they may know that! So it’s either: they may know that and their goal is to take it back, or they don’t know what they’re doing.
20.I’ve heard a lot of other people say there’s a lot of hidden fees. Do you know what the other people’s hidden fees are? And how would you find out if they have hidden fees or not?
I would ask upfront for a fee breakdown: “I want to know every single fee you have that you’re going to charge me.” And what you’ll often see is a fee to prepare your loan, to close your loan, a fee for the loan docs, there’s a fee for wiring, flood certification, potentially be servicing fees, and there might even be monthly servicing fees that they charge that aren’t included in here.
People literally can be feed to death on these loans so really dig into it. Here at FasterFunds Lending we have a really simple sheet we can just send to people right away. If a hard money lender sends something like that to you right away that’s probably a good sign. It means they’re going to be open about it. If they’re hesitant, they’re pushing back, that would be a red flag for me.
We are here to offer win-win situations with our borrowers, and are happy to answer any questions anytime!