New Criteria for Hard Money - by Bob Beckman

Not a week goes by that I don't read the following refrain on some real estate investing web site: "Where are all of the real hard money lenders?" As an active hard money lender, and knowing others who do this around the country, this always amuses me.

It has become apparent over the years that there is an ongoing debate about the services that a hard money lender should offer and what criteria is warranted, and in most instances necessary, for both lender and borrower.

In this article, I hope to explain the changes that have taken place over the years in this important relationship and what to look for with regard to hard money lenders.

First I would like to address a prevalent myth. Hard money does not necessarily imply that the loan is based solely on the equity of the property in question. This is a very common misunderstanding.

Many years ago, private lenders (hard money lenders), used the actual property as its own collateral. If the borrower paid them back, that was great, but if there was ever a default situation, that would be fine too. The lender always loaned far less on the property than the fair market value so in the long run a lender stood to make an even greater profit by foreclosing on the property and selling it.

You may wonder how this has changed. After all, no hard money lender will lend more than 65%-70% of the after repair value on a property, and the high fees and interest rate should more than compensate them for any inconveniences. So what's the problem? Why is it so hard to find private lenders who don't ask for credit information? Why won't they all do "no-doc" loans? Where are the "real" hard money lenders?

Well investors, here's something you may have not considered. Years ago, most states were "non-judicial states", meaning that the foreclosure process was simple, fast, inexpensive, and didn't involve an involved court fight. The burden of proof, in many cases, was on the defaulter. Under these laws, it made sense for the lender to bypass the credit and pay history of the borrower. Either way, their investment was sound.

What happened? Consumer protection laws and other factors have slowly changed most states into "judicial states". The burden of proof for the foreclosure process has changed.

To further complicate matters, if the borrower (the real estate investor) rented out the property, the lender would be screwed because of current squatter's laws. In these instances, the lender has to go through an expensive and time-consuming court procedure. Even though the lender will get the house in the end, the expense and effort has killed the investment.

If this happened often, it would drive them out of business. In many cases, this is what happened over the years to most of the equity-only based hard money lenders. This is why most of today's hard money lenders will check credit scores and, in most instances, ask for further documentation such as tax returns, bank statements, etc.

I find that Rehab Funding, as well as most private lenders, are much easier to deal with, much more streamlined, and have far less red tape than a bank or lending institution. The only difference from those "good old days" is that today we are more careful about dealing with "anyone who can fog a mirror".

Speaking for myself, when I work with a real estate investor, I want the legal option to foreclose, but I want to know that the history of the borrower indicates that this is highly unlikely.

So, if hard money lenders insist on checking credit, what good are they? Let me start with the obvious: most banks and lending institutions don't want to touch rehab projects. In stark contrast, this is our specialty (acquisition and repair money for rehab projects).

Consider this: if you find a bank willing to do a deal with you, will they require a down payment? If you are buying a property for $50,000, and they require a 20% down payment, that's $10,000 out of pocket at the settlement table, and this does not include standard closing fees, which are extra.

A hard money lender like Rehab Funding requires no down payment. Also, no bank or lending institution that WOULD do this type of loan would fund 100% of the acquisition cost AND 100% of the repair costs. If you buy the property for the right price (using Cameron Dunlap's or Rehab Funding's formula for buying properties) that's exactly what we CAN do.

Another huge advantage of hard money is quick loan turn-around. If you are bidding on a foreclosure property, an estate sale, or any property from a motivated seller, your ability to move fast will often determine your ability to "steal" a property. Banks will normally take thirty to sixty days to close. This will rob you of your competitive edge. Rehab Funding and most private money sources can close within two weeks. That's a BIG advantage to have when bidding on a property!

Beware of pre-payment penalties! As a real estate investor, you should never deal with a loan that includes such a penalty. The faster you work, the more your investment will pay off. Always remember that each day you will be paying interest, taxes, insurance, utilities, and contractors. This comes right off your bottom line, so all of your energy should go into flipping the property or finishing and refinancing it as soon as possible.

Why would you ever want a loan that penalizes you for finishing quickly? Rehab Funding has never charged pre-payment penalties and we WILL never do so. We also have no "seasoning" issues.

Finally, you should know the other advantages come with a hard money loan that are not available elsewhere. For instance, Rehab Funding has a Six Month-No Pay Plan for investors with strong credit. Those of you who have worked on properties know how difficult cash flow can be to manage. This plan alleviates this problem, and only a hard money lender who deals with real estate investors day-in and day-out will provide such a great program.

The bottom line is this: don't use hard money because "they don't care about your credit". Use hard money because our programs are designed to maximize your profits as a real estate investor.

Bob Beckman is the president of Rehab Funding To learn more go to www.rehabfunding.com