So called "Hard Money Banks" are what are also called predatory banks. This means they make loans based on the grounds that the terms to the borrower have to be such that they can willingly foreclose when necessary. Conventional lenders (banks) do everything they can do to avoid taking back a property in foreclosure so they are the true opposite of hard money banks.
In the good old days prior to 2000, hard money lenders just about loaned on the After Fixed Price (ARV) of a property and the percentage they loaned was 60% to 65%. In some cases this p.c. was as high as 75% in active (hot) markets. There was not a great deal of risk as the real-estate market was booming and cash was easy to borrow from banks to finance end-buyers.
When the easy times slowed and then stopped, the hard cash lenders got caught in a vice of speedily declining home values and investors who borrowed the money but had no equity (money) of their own in the deal.
These rehabbing stockholders simply walked away and left the hard money banks holding the properties that were upside down in worth and declining each day. Many hard money lenders lost everything they'd as well as their clients who loaned them the money they re-loaned.
Since then the lenders have significantly changed their lending standards. They no longer look at ARV but loan on the purchase cost of the property which they should approve. The investor-borrower must have a satisfactory credit report and put some money in the deal - usually 5% to 20% depending on the property's purchase price and the lender's feeling that day.
Nevertheless when all is clear, hard money lenders keep on making their profits on these loans from the same areas:
The interest charged on these loans which can sometimes be anywhere from 12% to 20% dependent on difficult market conditions between local hard cash banks and what state law will allow.
Closing points are the main income source on short term loans and go from 2 to 10 points. A "point" equals one percent of the total borrowed; i.e. If $100,000 is borrowed with 2 points, the charge for the points will be $2,000. Again, the amount of points charged depends upon the sum of money borrowed, the time it's going to be loaned out and the danger to the lender (investor's experience).
Hard money banks also charge various costs for virtually anything including property inspection, document preparation, legal review, and other items. These charges are pure profit and may be counted as points but aren't because the mixing of the points and interest levied the financier can exceed state usury laws.
These banks still look at every deal as if they will have to foreclose the loan out and take the property back - they happen to be and always will be predatory banks. I would guess that 5% to 10% of all hard money loans are foreclosed out or taken back with a deed in place of foreclosure.
So apart from the tougher requirements of hard money banks, there have been no fundamental changes as to how hard cash banks make their profits - points, interest, costs and taking properties back and reselling them.
These banks also look at the investor's capability to repay the loan every month or to make the required interest-only payments. If you go to borrow hard money, expect to require some of your very own cash and have some in reserve so that you can carry the loan until the property is sold.
In the good old days prior to 2000, hard money lenders just about loaned on the After Fixed Price (ARV) of a property and the percentage they loaned was 60% to 65%. In some cases this p.c. was as high as 75% in active (hot) markets. There was not a great deal of risk as the real-estate market was booming and cash was easy to borrow from banks to finance end-buyers.
When the easy times slowed and then stopped, the hard cash lenders got caught in a vice of speedily declining home values and investors who borrowed the money but had no equity (money) of their own in the deal.
These rehabbing stockholders simply walked away and left the hard money banks holding the properties that were upside down in worth and declining each day. Many hard money lenders lost everything they'd as well as their clients who loaned them the money they re-loaned.
Since then the lenders have significantly changed their lending standards. They no longer look at ARV but loan on the purchase cost of the property which they should approve. The investor-borrower must have a satisfactory credit report and put some money in the deal - usually 5% to 20% depending on the property's purchase price and the lender's feeling that day.
Nevertheless when all is clear, hard money lenders keep on making their profits on these loans from the same areas:
The interest charged on these loans which can sometimes be anywhere from 12% to 20% dependent on difficult market conditions between local hard cash banks and what state law will allow.
Closing points are the main income source on short term loans and go from 2 to 10 points. A "point" equals one percent of the total borrowed; i.e. If $100,000 is borrowed with 2 points, the charge for the points will be $2,000. Again, the amount of points charged depends upon the sum of money borrowed, the time it's going to be loaned out and the danger to the lender (investor's experience).
Hard money banks also charge various costs for virtually anything including property inspection, document preparation, legal review, and other items. These charges are pure profit and may be counted as points but aren't because the mixing of the points and interest levied the financier can exceed state usury laws.
These banks still look at every deal as if they will have to foreclose the loan out and take the property back - they happen to be and always will be predatory banks. I would guess that 5% to 10% of all hard money loans are foreclosed out or taken back with a deed in place of foreclosure.
So apart from the tougher requirements of hard money banks, there have been no fundamental changes as to how hard cash banks make their profits - points, interest, costs and taking properties back and reselling them.
These banks also look at the investor's capability to repay the loan every month or to make the required interest-only payments. If you go to borrow hard money, expect to require some of your very own cash and have some in reserve so that you can carry the loan until the property is sold.
About the Author:
Tim Kelly is a professional in finance having completed his LLM in Finance (Master of Laws in Finance) from Institute for Law and Finance at Frankfurt University. To Find Pay-day loan, straightforward business loan, 24hr private loans in singapore
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