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Do you have a question about financing real estate transactions? Now you can get them answered by Dan Burke, financial expert for Capital Trust. This month, Joe, a plumber, asks about the advantages of using hard money to purchase foreclosed properties.Dear Dan,Joe,
I am a plumber who has done many jobs on real estate investments for other people. I've pretty much made other people money and now want to get involved myself. I'm interested in investing in the foreclosures market but am wary about hard money and the points associated with using such a lender. What are the advantages of using hard money in my situation and do they justify the cost?
- Joe the Plumber
Congrats on taking this step as it's a great time to invest in the real estate market. The question you pose is very common in that many people are unfamiliar with this lending resource and often perceive hard money as a last resort option.
This is not the case. Hard money is called such because it is based on the hard asset(s) being pledged in the deal. This refers to the subject property and in some cases the cross collateral as well. The loan is not based on credit nor income and is usually a short term or bridge loan. Typically, hard money lenders fund to a 65% loan to value (LTV) threshold -- depending on the strength and location of the asset.
Your particular strategy lends itself to hard money for a number of reasons: flexibility, speed, and opportunity. As you know, foreclosed properties are, by and large, vacant and owned by banks. This vacant status is a major red flag for conventional lenders and effectively negates the deal in their eyes. Furthermore, a fair number of these foreclosed properties may be in a dissolved condo association which further complicates matters with conventional lenders. Similarly, the banks are not interested in these deals. As mentioned, hard money lenders' lending model allows them flexibility in such cases when the real estate equity position makes sense. Additionally, the days of conventional loans for those with sub-standard credit and/or stated incomes are history.
Another advantage with using hard money in your situation is speed. It is Important to understand that banks are in the business of lending and not holding properties; therefore, they are interested in selling these properties to correct their balance sheets. So, if you can establish yourself as a motivated investor with quick financing, then you will be more likely to land the deal. Hard money lenders can fund loans in a matter of days, whereas conventional lenders often take weeks, and in some cases months, to fund deals they actually consider. To be able to say "I can fund this deal next week" will speak volumes.
At the end of the day, hard money is not the right fit for every deal; however, if you have deals that need flexible guidelines and an accelerated need for speed in financing, hard money is right for you. Understanding the points charged as part of the big picture, you will quickly realize that it's not the cost of the money that's most important, it's making the deal and ultimate profit.
Simply put: no deal, no profit. With the increasingly stringent guidelines of conventional lenders and the abundance of low-priced inventory, now is your opportunity to capitalize. Carpe Diem!
Your particular strategy lends itself to hard money for a number of reasons: flexibility, speed, and opportunity. As you know, foreclosed properties are, by and large, vacant and owned by banks. This vacant status is a major red flag for conventional lenders and effectively negates the deal in their eyes. Furthermore, a fair number of these foreclosed properties may be in a dissolved condo association which further complicates matters with conventional lenders. Similarly, the banks are not interested in these deals. As mentioned, hard money lenders' lending model allows them flexibility in such cases when the real estate equity position makes sense. Additionally, the days of conventional loans for those with sub-standard credit and/or stated incomes are history.
Another advantage with using hard money in your situation is speed. It is Important to understand that banks are in the business of lending and not holding properties; therefore, they are interested in selling these properties to correct their balance sheets. So, if you can establish yourself as a motivated investor with quick financing, then you will be more likely to land the deal. Hard money lenders can fund loans in a matter of days, whereas conventional lenders often take weeks, and in some cases months, to fund deals they actually consider. To be able to say "I can fund this deal next week" will speak volumes.
At the end of the day, hard money is not the right fit for every deal; however, if you have deals that need flexible guidelines and an accelerated need for speed in financing, hard money is right for you. Understanding the points charged as part of the big picture, you will quickly realize that it's not the cost of the money that's most important, it's making the deal and ultimate profit.
Simply put: no deal, no profit. With the increasingly stringent guidelines of conventional lenders and the abundance of low-priced inventory, now is your opportunity to capitalize. Carpe Diem!
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.
I would like to invite you to our national conference on hard money lending, REO banked owned property Financing, residential mortgage pools and much more. Held in Las Vegas at the Rio Hotel, September 3rd.
Investors, Brokers, Private Lenders and Real Estate Developers from around the country will be attending this once in a lifetime event.