To start hard money lenders always lend base on what is called AFTER REPAIR VALUE.. aka ARV. What does that mean? It means they lend base on what the property will be worth once it is fixed up vs. conventional lenders that lend base on what it is right now. This being so, if you are in the business of fixing properties you need to work with hard money lenders as they are some of the best private lenders out there.
To get started get on google and find a local hard money lender. The more local the lender is to where you do business the better as they are more familiar with your buying area.
Cost of Capital
From there give them a call and ask them what is the points and cost to borrow for 12 months. They will typically say 2 points and 12% depending where you are in the country.
What 2 points mean is, whatever amount you borrow you need to pay them 2% to take that money.
As for the 12%, that is interest for the money over a period of 1 year. So if you only borrowed 100k for 6 months, that means you pay 6k worth of interest.
So for example say we called a lender and they said the points is 4 points and 14% interest a year. Say your borrowing 100k, that means on the day you get the loan you need to pay them 4% of 100k which is 4k to get the money.
As for the 14% interest, you need to multiply 100k x .14 = 14k / 12 months = 1.167k a month. That means if you take 9 months to flip the property you need to pay your hard money lender 9 x 1.167k = 10.5k.
Along with the above ask your potential lender what is the application fee and what is the review process like to set yourself up for financing. Typically hard money lenders will charge you $200 to $400 to review you as a prospective borrower. They will ask you for permission to pull your credit. Along with that they will ask you for the following
2 Year Tax Returns
2 Year W2
2 Months of pay-stubs
Scope of Work
A scope of work is the breakdown of all the improvements you plan to do to the property. Item per item, cost for each item written up by a contractor you plan to hire to do the job. The hard money lender will need this to review the projected rehab.
On the day of the appraisal you should send the appraiser your scope of work that way they know what improvements you will be doing to the property to give the lender the highest possible ARV for the property. SO the more clear your scope of work is… the higher your ARV can potentially be.
Not only will you be paying for your attorney to represent you on the closing, you will also be paying for the lenders attorney. So make sure to ask them what that cost is anticipated to be.
Some local lenders
More to come…
Secret to every hard money lender…