How Hard Money Really Works
Commonly real estate investors who aren’t used to using private money or “hard money” wonder how the process works. If you watch HGTV shows such as “Property Brothers” or “Flip or Flop“, every now and again they mention hard money lending or even bridge loans as a financing option. Without a clear understanding of the product and the real benefits, you are left in the dark thinking it is a costly option with little upside. We would like to change that belief and assumption that “Hard Money” is in fact, HARD to understand.
In the 3rd quarter of 2015, we originated a loan to a borrower who had a property under contract in the Graduate Hospital section of Philadelphia. The property was in shell condition and needed to be gutted and rebuilt. Below are before and after pictures of the subject property and we’ll walk through the entire deal (yes, it’s time to shed light on all the costs involved so we can truly analyze how hard money works).
INITIAL PROJECT METRICS (this is what we look for when a borrower calls in with a new deal):
- $192,000 – Purchase Price
- $85,000 – Estimated Renovations
- $410,000 – Projected After Repair Value (known as ARV)
It is important to note that not all lenders have the same requirements for lending. At Dalin Financial we try to simplify the process by requiring LESS deposit on our loans (10% of the loan amount) and offer a streamlined underwriting process to approve deals quickly – this means ALL our deals are expedited and you’ll get to closing much faster.
Our current maximum LTV (known as Loan to Value) we lend is 65% of the ARV. In this case, $410,000 x 65% = our loan of $266,500.
Interest Escrow: We hold a minimum of 3-months interest payments up-front. This is known as “Minimum Earned” (similar to an insurance policy you might buy on a property). This also means that the borrower has the first 3 payments pre-paid.
- $266,500 – Loan Amount
- $26,000 – Borrower Deposit Required (10%) — as opposed to a bank that will require 20% of the purchase price, rehab costs AND closing fees.
- $8,995 – 3-Month Interest Escrow — in this case, our loan accrued at 13.50%. This is based on borrower underwriting and deal analysis.
- $1,999 – Odd-day Interest — this is interest from the day of closing to the end of that month.
- $20,000 – Closing Costs — this includes all lender fees and points, title insurance, transfer taxes, property taxes, property insurance, etc.
- $71,000 – Rehab Escrow — because we roll all closing costs and fees into the loan, what is left AFTER closing is used for renovations and issued in draws.
The property was pre-marketed by the realtor before going on MLS and an offer came in for $400,000 with no mortgage contingency and a 30-day closing. Needless to say ALL real estate investors wish for this type of sale! The following resale analysis represents actual values and how hard money works.