If you are looking for homes to invest in, you probably came across listings with the disclosures such as “handyman special,” “sold as-is,” and “cash offers only.” Why would a seller’s agent be compelled to include such disclosure?
They all mean the same thing for potential buyers: this particular property is in too bad of a shape to qualify for conventional financing. Instead, a real estate investor looking to make an offer is left with two options: to avoid borrowing funds altogether and purchase a property with cash or, more realistically, to obtain financing from a hard money lender.
Using Hard Money Loans for Real Estate Investments
Hard money lenders are a unique subset of mortgage companies. Hard money lenders work exclusively with real estate investors and don’t provide financing for owner-occupied properties. They specialize in lending on distressed properties that can be worth much more than its purchase price once the investor completes the renovation process.
A unique feature of a hard money loan is that it’s based not on the purchase price of a property but on the home’s after-repair value. Since the after-repair value is typically significantly higher than the purchase price, hard money loans provide borrowers with exceptional financial leverage.
“It’s not unusual for us to lend 100% or even more of the purchase price,” says Kyle Sennott, the managing partner of New Funding Resources, a hard money lender in the Washington, DC area.
The final structure of a hard money loan, including the loan amount and borrower’s contribution, is typically determined by the mathematical relationship between three key numbers. Those numbers are the purchase price, the anticipated rehab budget, and the expected after-repair value.
It’s pretty simple: the better the deal, the more leverage a hard money lender can offer. To see for yourself how much you can borrow from a hard money lender, you can use a hard money loan calculator.
The underwriting on a hard money loan is typically more streamlined than for conventional financing. Many hard money lenders do not verify income. Because of this, they are often confused with subprime lenders – lenders that specialize in helping borrowers with poor credit and non-verifiable income to buy primary residences.
Hard money lenders might have similar flexibility in underwriting as some subprime lenders, but their goal and business model is very different. The simplicity of underwriting also means that a loan can close quickly – often within days – giving a real estate investor that much-needed edge against the competition.
Hard money lenders democratize real estate investing by helping real estate investors without deep pockets to effectively compete with all-cash buyers.
Without them, real estate investing will be an exclusive domain of super-rich – folks with hundreds of thousands of dollars in their bank. That is not to say that hard money lenders are keen on lending just to anyone.
At the very minimum, they are looking for borrowers with some nest egg of their own and the ability to find real estate deals with good profit potential.