12–14 minutes to read

Are Hard Money Lenders a Good Idea?

A few months ago, I saw a killer bargain listed in the MLS.

The home was in the suburbs of Memphis, TN, a few miles away from my home.

8174 Old Brownsville, Rd.

The listing agent listed it for a quick sale of $144,900.

After a quick preliminary review of the neighborhood comparables given to me by my Realtor, I saw that the home easily had an after-repair value of $210,000 and could be flipped within 90 days.

My Realtor and I walked through the home and I quickly saw the obvious needed repairs. The home needed a new paint job, hardwood floors and carpet, new kitchen counters, a new window, and only a few other things which could have been taken care of with a total budget of $20,000.

Unfortunately, I knew from my experience with past homes in similar conditions that no conventional lender would have loaned out the money for the home in its condition.

So, I needed to look for unconventional financing to fund the deal.

My first thought was to obtain an unsecured personal loan for $100,000 and use this in conjunction with my personal savings. I prefer investors use an unsecure loan for their deals because it’s much easier to get the funding when compared to conventional real estate financing methods.

But, I had applications pending at a conventional lender for two other investment properties at the time.

I didn’t want my credit pulled and I didn’t want to spend the majority of my cash reserves.

If my credit was pulled to obtain a new loan, I would have had to explain it to the conventional lender, who would have, in turn, calculated the new loan payment to determine a new debt-to-income ratio. This could have affected underwriting’s approval of my loans. If I used the majority of my cash reserves, I would have been ill-prepared to handle any large cash emergencies in my new investment properties.

So, I decided to seek other financing through a hard money lender.

What is a Hard Money Loan Lender?

In the real estate investing world, a hard money lender is usually a private individual or group of private individuals that lend investors money based on the value of the underlying property, as opposed to their credit score. However, their fees are usually much higher than a conventional lender.

I personally didn’t know of any hard money lenders so I went on Bigger Pocket’s real estate community website to search their list of sponsored hard money lenders.

Having never used a private lender but anxious to put an offer on my new golden find, I found a hard money lender and filled out the application for $125,000.

I didn’t even consider the amount I would end up paying for the loan.

A quick, rough estimate in my head calculated the number around “yep, I’ll profit from the flip.”

I just wanted to get a pre-approval letter as quickly as possible so I could put in my offer to the listing agent.

What were the Hard Money Loan Requirements and Interest Rates?

The hard money lender that I chose had a seemingly easy process.

The requirements were pretty simple.

I provided some preliminary information about the home, upload a few pictures, told them about my real estate investing experience, and then clicked through their terms of service.

In a few minutes, I was given a preliminary approval of 19% for a 6 month loan at $125,000.

But, there was a 90 day interest paid minimum requirement.

So, even if I had sold the property in 30 days, I still would have had to pay 90 days of interest on my loan.

The rate seemed excessive to me, but I couldn’t really complain. I was fueled by my drive to quickly secure my property.

I only focus on the fact that I was going to make money on my deal regardless, so 19% was relatively cheap, relative to the money I didn’t have myself.

I was hyped.

At this point, I didn’t see if there were any other charges, but I knew there were. They just weren’t listed in my profile’s dashboard at the time.

Later though, I found that in addition to my 19% interest rate for 6 months on the $125,000, there was a 3% origination fee and a 1.5% service fee.

Hard Money Loan Example

For the lender that I was going to use, here were the numbers:

Loan amount: $125,000

6 months of interest at 19%: $23,750

2.5% origination fee: $3,125

1.875% interest rate: $1,875

Total loan amount if kept for 6 months: $28,750

Would I had been profitable with this Hard Money Lender?

In short, I didn’t end up getting the home.

I had offered only the list price.

I was outbid and ultimately an offer of $151,000 was accepted.

It was my lucky day.

Going into this deal, I just knew that I would have been profitable, but after running the actual numbers…after the fact…I realized that the only people who would have made out on my deal were the lenders and the selling agent.

Here are the numbers assuming I sold the property for my estimated sale’s price of $210,000:

Purchase price: $151,000 + Estimated rehab costs: $20,000 = $171,000

(Acquisition costs) – (After-repair selling value: $210,000) = $39,000

Gross profit: $39,000

The gross profit estimate looks great doesn’t it? And that was my problem. I didn’t even consider the cost of financing and selling the property.

(Gross profit: $39,000) – (cost of financing for 6 months: $28,750) – (6% of sale’s price realtor fee: $12,600) = $-2,350

Estimated Net Profit: -$2,350

What’s missing from the above estimated net profit?

(Closing cost: $2,000) + (holding cost such as utilities ($200 per month): $1200) + (any other miscellaneous costs) = -$5,550

Final Estimated Net Profit (Worst case estimate): -$5,550

Bottom line, I could have bought myself a 6 month stressful job of flipping a property with ZERO profits.

Other Hidden Cost of Using a Hard Money Lender

With only $125,000 funded with financing, I still would have had to use at least $26,000 to close the initial deal, and then another $20,00 for the rehab. So, a total of $46,000 would have been tied up in this project. This is money that could have been used to source other, more profitable deals.

Aside from tying my money up into one project, the hard money lender that I was going to use secures their loan with the underlying property. In other words, they put a first “mortgage” lien on the property, and if I couldn’t have sold the house within the 6 month loan period, the entire loan balance would have been due. The lender would have had the right to foreclose and then take the property, taking it along with the $46,000 that I would have put into the project.

Are Hard Money Lenders a Good Idea?

Obviously, the numbers above use a worst case scenario for THIS deal, and there are plenty other hard money lenders with different funding requirements.

Rehab costs could have been lower, I could have sold the property in fewer than 90 days, and I could have used a listing agent who only charges 1.5% (My Realtor charges me 1.5%).

These numbers would look a bit differently:

Rehab: $10,000

90 days interest: $11,875

Realtor fee of 4.5%: $9,450

3 months holding cost: $600

Net Gross Profit (Better case estimate): $20,075

Somewhere between -$5,550 and $20,075 lies the truth of my would have been net estimated profit.

But remember, everything is an estimate of profit or loss until the deal is done.

Conclusion

In the end, using $46,000 (estimated cash to close plus rehab) of my own money to yield $20,075 (or -$5,550) would have been a great return on my investment 43.64% (or -12.06%), if all went well.

So, I’d conclude to say, “given a best case scenario, hard money lenders can be a great idea.”

But you have to run the numbers and do your own due diligence…before putting an offer on a deal.

If I would have applied these calculations beforehand, this decision would have come down to one question:

Is this hard money loan worth the risk of earning only a negative ROI after putting in 6 months of hard work into this real estate project?

I probably would have concluded no.

Question: Have you used a hard money lender? What was your experience?

 

11–13 minutes to read

Can you find out how much someone owes on their mortgage?

Can you find out how much someone owes on their mortgage?

When I began making offers on owner occupied homes listed in the MLS, one of the things I wish I could find was the amount someone owed on their mortgage.

The idea was simple, if I could find out the amount they owed, and could offer a little bit above this amount, I would increase the chances of my offer being accepted.

Unfortunately, I could never find this information.

The exact amount someone owes is private and this information is held by the servicing institution and the seller.

Short of talking to the seller himself, and getting him to give you the information, there is no direct way to find out how much someone owes on their mortgage.

Even if you knew the beginning balance of the mortgage, the seller could have made extra payments, missed payments, or stopped making payments, altogether.

For all you know, the seller could be saving up the amount they should be paying to their lender so they can, in turn, use the money to move to another location.

So, unless this information is directly communicated to you by the seller, you won’t be able to use this information to start your bid.

The only time you’ll know exactly home much someone owes on their mortgage prior to transferring the property in your name is after your closing company receives a loan payoff amount from the seller’s loan servicer. If you’re at this point, it’s safe to assume that you’ve already made an offer on the property.

This means that you’ll have to learn how to do some ninja financing in order to get a best estimate of how much someone owes on their mortgage.

How to estimate how much someone owes on their mortgage?

1. Find out the original mortgage price.

Luckily, many counties in different States have at least the original mortgage balance listed on the deed of trust. This information is the required starting point to make a best guest estimate. Surprisingly, the seller’s deed of trust is public on many county’s Register of Deeds’ website.

For example, you can find the original mortgage price of a home I purchased in Charlotte, North Carolina in 2011 by accessing Mecklenburg County’s Register of Deeds. Let’s see how this is done:

Go to Mecklenburg County’s Register of Deeds site. Once on the website, and after acknowledging their terms of service, search for the Real Estate Document Access link.

As you’ll see on the site, you can search for information about a property using several different search options. If you use the Combined Name Search field and search for my actual last name, [Clayton], followed by my first name [Romeo], several documents will be uncovered.

property records screen shot

Under the documents, instrument number 2011105857, is the record deed of trust on my property.

deed-of-trust

If you click through it, page 2 of the recorded deed of trust shows information about the note. The amount of the note is $101,150.00.deed-of-trust-note

This is the amount I owed on my mortgage in September 2011.

**If you don’t know the seller’s name, your county may have a search option for the property’s address. Mecklenburg has this information on a separate site called their Mecklenburg County Real Estate Lookup tool. Put in the property’s address and you’ll find the name of the last owner.

2. Find out the year that the note is due in full.

On the same recorded deed of trust in the Note Section, the full amount of my note was due on October 1, 2041. This was 30 years after the date of the recording which means it’s safe to assume that I had a 30 year mortgage. The only thing to determine at this point was whether my interest rate was fixed or variable.

3. Determine if the rate is fixed, adjustable, or has a balloon payment.

If the mortgage rate was anything different than a fixed rate, you’ll usually notice this in the “Riders” section on the Deed of Trust. For example, my deed of trust would have had either the adjustable rate rider or balloon rider box checked on the Rider section. It does not, so it’s safe to now assume that I had a 30 year fixed rate mortgage product.

Now, the only thing to estimate is the interest rate attached to the note.

4. Estimate the interest rate based on historical data.

Once you know the original mortgage amount, the date the mortgage is due in full, and the mortgage rate product, the rest becomes an educated guessing game. To make the best educated guess, you can use historical mortgage rate data from an online site that tracks this information such as Mortgage Daily News. Using the date that the deed of trust was recorded, September 22, 2011, you’ll see various mortgage rates during the month of  September.

In September 2011, mortgage rates averaged 4.25%. So, this is the number you could use.

**My actual interest rate was 4.0%, so turns out this would have been a great guess.

5. Back calculate a best fit mortgage payment into a loan amortization calculator.

Using the information from above, you can now use any loan amortization calculator to determine an estimate of the current mortgage balance, with a few caveats.

  • Caveat #1: Ensure a second mortgage doesn’t exist. If it does, you’ll have to repeat the process and add this amount to the first mortgage.
  • Caveat #2: Realize that early payments could have been made or that payments could have been missed.
  • Caveat #3: Make sure you’re looking at the correct real estate documents, including the most recent recorded deed of trust.

Luckily, Excel comes with a great, free template for estimating how much someone owes on their mortgage.

In Microsoft Excel, go to File, New, and you’ll see the Loan Amortization Schedule template in the Template Section. If you don’t see it, a quick Microsoft Office Template search will bring it up.

Download the file, open it, and plug in the information you’ve found.

This gives an estimated scheduled payment and a break down of the ending balance on the mortgage after each monthly payment is made.

how-to-determine-mortgage-balance

6. Estimate the remaining mortgage amount.

Using the information you put into the Excel template, if you wanted to purchase the property in September 2013, you’ll see that there was a mortgage balance remaining of $97,665.59.

If you compare this number to the one that uses my actual interest rate of 4.0%, you’ll see that you’d be pretty close.  My actual remaining balance in September 2013 was $97,514.85. My estimate would have only been off by $150.

how-to-determine-mortgage-amount-2

All the Information to Estimate Someone’s Mortgage Payment May Be Public

In some rare cases, all the information you need to estimate someone’s amortization schedule may be public.

When I refinanced my property in 2013 with a new lender, I received a new Deed of Trust recorded as instrument# 2013152507.

deed-of-trust-2

However, the Adjustable Rate Rider was also recorded with the deed of trust.

And on the Adjustable Rate Rider, the interest rate was recorded showing an adjustable rate of 3%, the way the rate adjusts, and the limits on the rate. Couple this with the amount of the loan on page 2 of this Deed of Trust and one can easily calculate what my monthly payment was.

new-amortization-schedule

Conclusion

Using information that is likely already public in your county, you can calculate an estimate of what someone may owe on their mortgage. You can use this information to your advantage by making a purchase offer that’s low enough to save you money but high enough to not offend the seller, assuming he wants to get a price that is at least over his current mortgage principal balance.