Socalled “Hard Money Lenders” are what are also known to as predatory lenders. This means they make loans based upon the idea that the conditions to the borrower must be such that they will happily foreclose if necessary. Standard lenders (banks) do everything they can do to avoid taking back a property in foreclosure so they are the true opposite of hard money lenders. Licensed Money Lender
In the good old days prior to 2000, hard money lenders pretty much loaned on the After Repaired Benefit (ARV) of a property and the percentage they loaned was 60% to 65%. In some instances this ratio was of up to 75% in active (hot) markets. Generally there wasn’t a lot of risk as the real estate market was booming and money was easy to grab banks to finance end-buyers.
When the easy times slowed and then ceased, hard money lenders received caught in a vice of rapidly declining home values and investors who borrowed the money but had no equity (money) of their own in the deal.
These rehabbing investors simply walked away and left the hard money lenders holding the properties that have been upside down in value and decreasing every day. Many hard money lenders lost everything they had as well as their clients who loaned them the money they re-loaned.
Since then the lenders have considerably changed their lending specifications. They no longer look at ARV but loan on the price of the property which they have to approve. The investor-borrower must have an acceptable credit score make some money in the deal – usually five per cent to 20% with regards to the property’s purchase price and the lender’s feeling that day.
However, when all is said and done, hard money lenders continue to make their profits on these loans from the same areas:
The interest charged on these lending options which is often anywhere from 12% to 20% depending on competitive market conditions between local hard money lenders and what state regulation will allow.
Closing items are the key source of income on short-term lending options and range from 2 to 10 points. A “point” is equal to one percent of the amount borrowed; i. at the. if $100, 000 is borrowed with two-points, the charge for the factors will be $2, 1000. Again, the amount of points charged is determined by the amount of money obtained, the time it will be loaned out and the risk to the financial institution (investor’s experience).
Hard money lenders also charge various fees for almost nearly anything including property inspection, doc preparation, legal review, and other items. These fees are pure profit and should be counted as points tend to be not because the blend of the points and interest charged the buyer can exceed state usury laws.
These lenders still look at every package as though they will have to foreclose the loan out and take those property back – they may be and always will be predatory lenders. I would guess that 5% to 10% of all hard money loans are in foreclosure out or taken back again with a deed rather than foreclosure.
So except for the stricter requirements of hard money lenders, there have been no critical changes as to how much difficulty money lenders make their profits – points, interest, fees and taking properties back and reselling them.