Of all the various lending platforms, hard money to be the most commonly misunderstood. This isn’t necessarily the fault of the broker. Most brokers only see one or two hard money deals a year. Couple that with the fact that most hard money lenders have wide variances in their programs, rates, and palate for risk. Add all that together and you have a recipe for confusion. Hopefully this article will help you better understand how a Florida hard money loan is looked at from the aspect of a lender. Please keep in mind, these views are that of my company and may differ from those of other lenders.

Q) Do you lend on Appraised Value or Purchas Price?

A) Until recently, many hard money lenders were willing to base their LTVs on a properties appraised value rather than purchase price. As the market continues to contract, this practice has become almost non-existent. The logic behind this change is simple. Properties being sold far below appraised value are typically distressed sales. If a hard money lender ends up foreclosing on a property, they need to get it off their books as soon as possible. This means they will be in the same position as the bank who is selling the distressed property. To a Florida hard money lender, a property is only worth what they know they can liquidate it for. If the bank is liquidating a property for 50k, a hard money lender has to assume this is the same threshold where they would be able to liquidate the same property.

Q) Are you a direct lender?

A) This is a good question to ask any private money lender. There are a variety of individuals who portray themselves as Florida hard money lenders, when in fact they are simply co-brokers who don’t have legitimate access to capital. This creates a broker chain and is bad for the borrower because it means steeper fees. People who specialize in private money will usually lend their own funds, or lend funds on behalf of “High net worth” individuals.

Q) Do you do lend on owner occupied properties?

A) This is one area of hard money lending which I find there to be the most confusion. Many brokers assume that if they have sufficient equity in a property, they can obtain a hard money loan. This is usually not the case however, due to the limitations of HOEPA’s Section 32 regulations. Basically, section 32 states that HOPEA loan cannot have an APR of more than eight percentage points above the rate on Treasury securities of comparable maturity. Complying with Section 32 is usually not an issue with conventional financing, but it becomes an issue when you have a rate in the double digits. As such, most hard money lenders will not entertain financing requests on owner occupied cash-out refinances. Proposed legislation set to take effect in August will require owner occupied purchases to also conform with HOEPA guidelines.

Q) What property types do you lend on?

A) There was a time when hard money lenders would lend on anything with 4 walls and a roof, as long as there was sufficient equity. As the market continues to dip and the demand for hard money increases, lenders are becoming far more selective about the type of properties they will lend on. Single and multi family homes in good condition are always desirable. Older homes and stick built homes are more difficult to finance.

Hard money financing for condominiums is becoming very scarce for numerous reasons. Many investors have seen their portfolios hit the hardest by condos they financed in the past. Low LTV financing is still available for high end and water front condos.

We prefer not to lend in rural areas. Some of our preferred lending territories are Broward, Dade, Palm Beach, Orange, and Hillsborough Counties. We lend hard money in Orlando, Ft. Lauderdale, Miami, Tampa, and Jacksonville. We will look at other areas on a case by case basis.

Commercial private money loans are always desirable to hard money lenders, but they typically require more documentation than residential loan requests. Most lenders will want to see credit and financials. Low FICO’s may not negatively affect a lenders decision, so long as the file has strong compensating factors. Ideally, commercial hard money loans should fall just outside the parameters of a bankable loan.

Land is one of the most difficult property types to obtain financing on. There are a couple reasons for this. First, it is almost always non-income producing. Second, there is very little construction going on right now. This means very little demand for land overall. If a lender ends up foreclosing on a piece of land, it is almost impossible to sell. The exceptions to this are waterfront and desirable commercial land.

Q) How do you determine a property’s value?

A) Value is usually determined by the hard money lender after an inspection has been performed. Many lenders will make their own determination of value. If the lender does order an appraisal or BPO, it is never used as the sole factor in determining value. Comps are only one tool used when determining a properties true value. It’s important to factor in variables like active listings and distressed sales.

Q) What are the rates and terms?

A) Average rates for a hard money loan in Florida are anywhere from 10% to 14%. Points vary widely but usually fall between 2 and 4. Note terms and prepay penalties vary too widely to be generalized. Always remember that hard money lenders are not bound by the same limitations as a traditional lending institution. If your borrower has specific needs, let the lender know ahead of time. Sometimes it may be possible to negotiate items such as prepayment penalties.

Summary:
Hard money loans are not for everyone, but they do have their place in a broker’s arsenal of tools. Hard money loans are also a great tool to use if you need a fast closing. Private lenders do not have the red tape and delays of traditional lending institutions. Loan request can often be funded in as little as 48 hours.

As banking guidelines continue to become more stringent, more borrowers are turning to hard money to facilitate their purchases and refinances. Many brokers even carve themselves a niche, using a network of private lenders to fund loans for real estate investors. A good understanding of this niche can open the doors to some excellent earning opportunities.

If you have questions or scenarios please don’t hesitate to call. You may also visit our website, where you will find program guidelines and submission forms.