Interview with the Expert: What is Hard Money and How to Use It
According to Dan Burke, manager of Boston-based Capital Trust LLC, people new to real estate investing often don’t know what hard money is and how it’s used to finance real estate investments. In this interivew, Dan answers a few of the most commonly asked questions – plus explains how you can use hard money when negotiating deals.
ForeclosuresMass Monthly: Dan, before we get into the questions about hard money, can you give a little bit of background about Capital Trust?
Dan Burke: Of course. Capital Trust was established in 2000 and is the leading private real estate lender in the Boston area. The principals of the company have extensive backgrounds in the acquisition and real estate developments arena.
FMM: What makes hard money lending different from conventional financing?
DB: There are many differences, but I’ll cover the most important distinctions. Specifically, hard money loans are made to investors only. Though there are some exceptions, typically owner-occupied loans are not considered.
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Second, the time-frame from loan origination to closing is shorter. As I’m sure many of your investors know, conventional lenders take anywhere from 30 to 90 days, sometimes longer on commercial properties, to fund loan closings. Capital Trust has a typical turn around time of approximately 5 to 7 days, and in the investing arena, this can be a major advantage when negotiating price.
Furthermore, we don’t require credit scores, tax returns, nor other normal paperwork. It’s important to note that hard money lenders are concerned with only how much equity is in the subject property, and any cross-collateral that is being offered with that underlying property.
FMM: So how do you determine if an investor is a good candidate for hard money financing?
DB: In our business every investor is a good candidate. Actually, I should clarify that; every investor who has a solid deal in front of him or her is a good candidate. Remember, we approve loans based on how much is owed on the property and how much it’s worth – which is simply the value or supporting equity in the deal you are presenting. As a general rule, we will lend up to 65% of the value of the property regardless of your credit score, tax returns or profession.
For example, let’s say you have a three-family in Roslindale that you’ve owned for 15 years, it’s currently worth $425K, and you owe $75K on it. You want to refinance it and take cash out in order to renovate the property and buy another property that’s a really great deal – in fact, you need to jump on it, like now.
Capital Trust looks at your numbers: $100K cash out, plus existing debt is $175K against the $425K value – it’s very easy to see that the loan to value (LTV) is lower than 65%.
In this case, a hard money loan helps you close on the hot deal more quickly – the money is ready in five days or less. In six months, you can then refinance with a conventional lender, and then pay off the hard money loan.
FMM: That sounds pretty easy. But you must look at other information in order to protect your side of the loan.
DB: Yes, that is correct. The other thing we look at – and this is critical – is strength and location of the asset. We do ask that you submit all documents that support the valuation of the property. And yes, our loans are based on whether we believe the asset is a good investment. If we find it appealing enough, we’ll request an appraisal fee/good faith deposit. This fee depends on the scope of the property.
On receipt of your check, we’ll dispatch our appraiser who does a valuation, and we’ll have the attorney run a Title check. If the reported and appraised values are similar and the Title is clear, we’ll put you in contact with the attorney who draws up the contract.
FMM: How can investors use hard money loans when negotiating terms with a seller?
DB: First, as a buyer with a hard money loan in your back pocket, you walk into a situation knowing you already have financial backing. So you’re in a very powerful position.
Second, you have more pull when negotiating a short sale with a bank. Banks don’t want to be property owners and are now starting to off-load foreclosed properties at below market price. One of our clients, for example, found a really great deal recently – a two-family in Quincy for $140K – which we funded. If you are involved with a short sale and you have funding, or you can get funding in three days, you’re in a very strong position with the bank.
FMM: Who typically comes to you for loans and can investors bargain with you on rates?
DB: Many people wrongly assume that only investors who are new to the real estate investing field will come to hard money lenders while investors who have established themselves will not pay the points and higher rates associated with Capital Trust and other hard money lenders. The truth is actually quite the opposite. Sophisticated, seasoned investors are by far the largest segment of our client base, the reason being that seasoned investors know that to pay an extra point or two, or a higher interest rate means very little when it allows you to save thousands or even tens of thousands of dollars on the purchase price. Also, a hard money loan allows you to avoid taking on a partner who will take 50% of your profit or net.
When working with a hard money lender, your bargaining power is really in the strength of your asset and your ability to cross collateralize. Hard money is not for every deal nor can we help every investor. Our interest rates are 13 - 15% and our points fall between 3 and 6 points. Bottom line: Capital Trust offers a very streamlined and straightforward process; one that can be a valuable resource for either the novice or seasoned real estate investor.
Dan Burke is the manager for Capital Trust, LLC, a Boston, Massachusetts firm that specializes in hard money lending. You can contact Dan by phone at (617) 971-9700 or by email at danburke@ecapitaltrust.com. To learn more about Capital Trust, visit www.ecapitaltrust.com.
