Chapter 1: Lesson 1: Page 2: Hard Money Lending Intro

Hard Money Course Transcriptions

Chapter 1: Lesson 1: Page 2: Hard Money Lending Intro

Hey everyone, it’s Paul Esajian and if you’re looking for a lender or you’re just not sure how hard money loans work, you’ve come to the right place. In this course, you will learn some tips on how to get your loan funded and how to utilize hard money to build your business, so stick around.

Chapter 2: Lesson 1: Page 2: Property Restrictions

Hard Money loans are typically funded for properties that are between 1 and 4 family units. Your hard money lender is going to look at your deals based on the property itself as well as you as the buyer. Although they will look at your financial situation- they will look at credit, they will look at how much money you have or don't have; the majority of their analysis will be based on the property itself, the value of the property, the after repair value, the repair estimate. So a lot of the decision making for a hard money lender is based on the property and not as much the person, although, you; the person, the borrower; is going to be an important piece of the relationship. If they don't trust you, they aren’t going to loan to you. If you don’t share that you’re educated, have tools, have knowledge, have the resources to start and finish a deal, again, they are not going to loan to you. But when we talk about the property itself, that's why hard money lending is so great. You don't have to have credit, or good credit, you might have bad credit, but if you find a really good deal, hard money lenders are going to structure the opportunity that makes sense for them and for you on really good deals. So here’s the two things I want you to do: Local hard money lender- establish relationship and then just the best hard money lender you can find, doesn't matter where they are. Now you’re going to start that process and you’re going to be in business to start sending deals to hard money lenders.

Chapter 2: Lesson 1: Page 2: Loan Timeline

Most hard money lenders are going to require and be in first position, lets make that very clear. I would say the most common loan term for a hard money lender is 6 months, although, you’ll see them do 9 months or 12 months, just depends, but you’ll see 6 months loans a lot. After the term of the loan, whether it’s 6 months or 9 months, there’s usually going to be an extension which varies between 1 and 2 points right? So if you have a $100k loan and a 1 point extension fee after 6 months. That means if you still have that loan in month 7, you’re going to pay 1 point which is 1 percent of $100k, that’s $1000 ok? Just to keep with that loan, that’s what an extension fee is. In addition to the fee there’s usually a rate increase when you go past that 6 months, 9 months, is written in the original loan. The rate usually increases- so you were at 14% for the first 6 months, if you go past 6 months maybe it bumps up to 16% or 18% from that point on. So, a rate increase. The whole idea is that a hard money lender wants you to buy, rehab, and sell that loan as soon as possible and if its 6 months they want you to do it within 6 months. Honestly, in some markets it will take more than 6 months to sell that home and you need to communicate that, you’re creating a relationship with your lender, so if you educate them, you’ll create that win-win set up because that's what you want with your hard money lender. The best idea I can share with you is communicate with your lender, let them know how long you think the deal is going to take in your market or your area, so you get the right terms from day one. Create that relationship, communicate, so that you and the lender set- up for success and from there you’re going to establish and start a great relationship with the hard money lender.

Chapter 2: Lesson 1: Page 2: Loan Calculations

So lets talk about the ratios at which hard money lenders are going to loan to you at. Some hard money lenders will go off the after repair value, some hard money lenders will go off your purchase price and some will do a combination of the purchase price and the rehab amount. The ideal hard money lender is the one who will go off the after repair value: what that property will be worth once it is fixed up. So if the house is going to be worth lets say $200k when its fixed up and you’re buying it for $150k and putting $10k into it then if that hard money lender says “Hey, I’ll lend at 70% of the after repair value,” well, in that example, they’ll lend $140k of the total loan, which means you need to come to the table with $20k right? ($150k+$10k is $160) So, the after repair value is a lot of times though where you can find a really good deal. Let’s say the after repair value ended up being $300k and you bought that same property for $150k, now at a $210k loan that the hard money lender would look at 70% of the $300k. So, if you bought that for $150k and only had to put $10k into it, you would have 100% financing. Now again, hard money lenders and going to always, in this day and age, request skin in the game. They want to see that you have money in the deal. So almost every lender is going to require you to come to closing with some money. The goal here is to find a lender who is going to lend the most money, hopefully off the after repair value and if not the after repair value, then off the combination of the purchase price and rehab amount so you can max out the amount you are borrowing.

Chapter 2: Lesson 1: Page 2: Renovation Funds

So when we talk about financing the rehab amount, the rehab money, with the hard money lender; in some cases they will build it into, again, if you’re borrowing off the percentage of the after repair value that might cover your rehab amount, what typically would happen if that does happen where you have more of a loan given to you than you actually need for the purchase is that they will keep some of the money in an escrow for your rehab, you’ll front the work, you do the work, spend the money up front, and then you’ll call them for an inspection and they will reimburse you as you go. So that's one scenario. Most hard money lenders want to get you rehab money because your house cant get fixed without rehab money, so if you cant show them that you have that rehab amount they are going to work with you to create a solution. Again, the process, whatever that solution ends up being, because most hard money lenders will always finance a portion of the purchase and a portion of the rehab, so just realize that. Now the draw process, when you do the rehab work, you have to do the work, write checks, and front the money right? Then you call them up, say you’re ready for an inspection then they will send someone to come to an inspection, you usually pay a fee for that, they review your work based off your detailed scope of work. Remember, you didn't get this loan until you gave them a detailed scope of work. So at this point you gave them a detailed scope of work of everything you want and are going to do to that property because that's how they figure out and give you the rehab amount as the finance portion that's held in the escrow. So again, you front the money for the work, you call them up, they send an inspector, approves it, tells the hard money lender and they wire a check and you keep repeating that process until the work is done.