HARD MONEY LENDING PROGRAM

Background:  After working for Thacher & Daughter, a local company for over 6 years, doing conventional loans as well as hard money loans, I could see the need for unconventional monies in the market place, and there was a desire for investors to make higher return on their money than is currently being paid by traditional savings accounts, IRAs, stock market and retirement fund investments, with security in real estate collateralized loans. Borrowers seek these funds, even at the higher interest rates as we are able to provide the funds very quickly, with no credit qualifying, strictly EQUITY qualifying is involved. With the values so low currently, many investors are taking advantage of the prices, but need their transactions closed faster than bank loans.

Loans:  All of our loans are secured by improved or unimproved real property (as opposed to personal property). These are equity based loans and for the most part are not concerned with the borrower’s credit status or employment status, at least not to the degree of conventional lenders.  The emphasis here is placed on equity in the unlikely event that there is a default; there is enough equity to hopefully ensure the return of the investors funds through foreclosure proceedings.  As a general rule, a loan is for no greater than 70% of the value of the property, with exceptions being made for borrowers that have a longstanding credit history with us and an excellent repayment history.

Although we are no longer doing constructions loans at this time, this is how they work:
In the case of new construction loans, the loan is funded in 6 draws.  The investor is asked for 6 checks, each one to only be deposited when requested by the contractor, thus allowing the investor to draw interest on those funds until disbursement.  Prior to releasing the funds, an inspection of the project will be done to ensure the work associated with the draw has been completed before any further funds are released. The construction loans are generally repaid in 6 to 12 months, depending on the project and the contractor.

Return of Investment:  The present market dictates interest rates ranging from 12-18%.  The spread is determined by the nature of the security---improved, unimproved, proximity to services (which is another way of saying salability in the event we had to repossess and sell in order to protect the investor) and various factors that attend the security and the borrower.  If the subject property is pristine, located in town, obviously it will earn the lower interest rate, if it’s a property in need of serious rehabilitation, in farther outlying areas, then obviously it would earn the higher interest rate.

Duration of loans:  Most loans we recommend are set for 3 years with the right to extend an additional 3 years if the payment history has been satisfactory.  Some loans are only for 1 year, and construction loans are for a term of only 1 year. This is not to say that we don’t have longer terms, or that they won’t be out there for a shorter term. Most of our hard money loans are short term that bridge an immediate inability to a foreseen ability.  For example, a quick cash deal is available to a person at a significant price reduction for acting quickly; a person is “curing” from poor credit or a bankruptcy, or a loan made on vacant land, which most conventional lenders won’t do, etc. Our loans bridge the time gap involved until a person can either obtain conventional financing, or time to cure either themselves or the property.  Statistically, about 60% of the loans are paid off within the first 2 years, which is to say the that the loan has served its purpose and now the borrower can either sell, or convert to a low interest conventional loans, which we also do.
With the recent economical changes as well as the sever market changes, we are also recommending borrowers obtain loans that are fully amortized. (pays both return of principal and interest rather than interest only) Bank loans are getting harder and harder to obtain, and with a fully amortized loan the borrowers don’t face a balloon payment later.

Prepayments:  All our loans carry a 3 month interest guarantee.  For instance, if you were to receive a payoff request only one month after providing the loan, the payoff would be for your principal, and 2 more months of additional interest.  Additionally, all loans carry a 10% late charge for any payment made 10 or more days beyond its due date.

Security:  A policy of title insurance is obtained on all transactions.  A note and recorded trust deed are evidence of the security.  On improved property, the lender will also be named on the owner’s hazard insurance policy. I only do 1st trust deeds.

Costs, Fees & Charges:  The borrower pays all the initial fees.  Broker will provide all disclosures in that regard.

Risk:  All loans are attended by an element of risk.  Hard money loans bring to the lender (investor) considerably higher interest rates than institutional loans because the element of risk is greater; borrowers frequently have a poor credit record and are considered a greater risk. (Although with the recent changes to the banking industry, many of our borrowers these days have credit scores of 700 or better)  We try to be conservative in the loans we originate so that in the event of default we have provided enough equity protection to solve the problem, be it by foreclosure and resale or by deeding back and then reselling the security property.  If you are not comfortable with equity lending with its higher degree of risk, you should not choose this method of investing.  Also, there are some costs involved should the loan default and the property reverting back to the investor.  These costs are generally recoverable at the time of resale.
If you would like the name and phone numbers of references (investors) who have participated in the hard money lending programs, just ask as we’re happy to provide that for you.

Please give us a call if you are interested, or if you have any questions.
Sincerely,
Patricia Brown

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