What are the common characteristics of hard money?
Hard money loans have much higher rates compared to other financing options. How high? Hard money rates in the ‘teens are common with some notes financed at 11 or 12 percent. Hard money loans typically have high lender fees. Multiple points, underwriting and processing charges are typical as well. Hard money loans require a hefty down payment or equity, as much as 50 percent in some cases. These loans are also for very short terms, anywhere from 90 days to two years is a typical term and used only long enough to acquire the property, renovate and flip.
Okay, so if the loans have ultra-high rates, require a large down payment, are expensive and are short term, who would ever take such a loan? Real estate investors buying a property that is in such poor condition no traditional lender would approve the project. You’ve probably experienced that in the past when an appraisal was performed on a home that had some major structural issues such as a faulty foundation or severe roof damage. Perhaps even the home couldn’t be repaired and had to be razed.
Investors take hard money as a temporary fix to get the property below market, complete the repairs then sell for a profit. Once the repairs have been made, the property is then eligible for traditional financing. Hard money isn’t the answer for most real estate investment transactions, but it’s important to understand their place in the industry. At Velocity we’re here to bridge the gap between banks and hard money lenders.
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