Hard money lenders and private money loans

You’ve heard us speak about hard money lenders and private money loans as a financing option, and several of you have written us asking just what is a private money loan and how you might get one. Some of you have asked us how to get in touch with a hard money lender, and what requisites you need to have to get funded for a real estate deal.

We recently sat down with Jim MacArthur, owner of JMAC Funding and its website thehardmoneypros.com.

HUDFORECLOSED.COM: Jim, what kind of buyer do you generally work with?
JM: We specialize in non owner-occupied properties; that is, our business is geared toward the buyer whose strategy is to rehabilitate the home and sell it at a profit within a few months, or rent it for an income stream.

HUDFORECLOSED.COM: Are private money loans the same as hard-money loans?
JM: Sure, they’re two terms for the same thing. They’re non-conventional loans from private investors, available at a faster pace than a normal bank loan and often in circumstances where conventional loans are unavailable.

HUDFORECLOSED.COM: These are meant to be relatively short term loans, right?
JM: Yes, they usually run one to two years. These loans come with a higher interest than the bank’s – typically around 12% – but, considering you’re only keeping the loan for a few months, the actual financial impact of the interest rate is pretty low.

HUDFORECLOSED.COM: What would prompt a buyer to get in touch with you?
JM: We can fund deals very fast. Also, we’re not very stringent on credit. We tend to focus on the deal: if it’s a sound purchase with a good exit strategy, and the numbers add up, then we’ll happily finance it. These days we’re tending to finance deals with something like a 65% loan to value ratio.

HUDFORECLOSED.COM: So this is a good way to finance a rehab project?
JM: Actually, we like for a buyer to come to us with the downpayment money and the rehab money sorted out. We’ll put up the rest, making it a cash deal as far as the purchase is concerned.

HUDFORECLOSED.COM: So then the buyer does the reconditioning, sells the home and pays off the loan, right?
JM: Sure, and that typically happens within three to six months on a residential property.

HUDFORECLOSED.COM: But what about a buyer who’s planning to rent the property out?
JM: Not a problem. In that case the buyer would refurbish the home, get a good tenant and, after a few months of tenancy history, he or she would get the property financed with a conventional loan.

HUDFORECLOSED.COM: Whereas they wouldn’t have been able to do that before?
JM: Right. For example, it’s hard to get the bank to finance an REO where the kitchen’s been gutted, or one that needs some other type of major rehab to make it rentable. Or maybe the buyer’s FICO was not in the best of shape, but a year later they’re much more established and now can convert to a conventional loan.

HUDFORECLOSED.COM: Ok, so we’re getting a good idea of the deals you tend to prefer. But, does someone need to have references, or special contacts, to partner up with a private lender?
JM: (laughs) No, they just need to come to my website (link) and call me.

HUDFORECLOSED.COM: Still, I’m sure there are deals you turn down.
JM: Of course. We tend to walk away from deals that are underfinanced. Suppose the buyer has $10,000 for the rehab project, and our inspection yields a very different picture. Suppose we assess it will take $50,000 to get the property move-in-ready. When we deem there are not enough proceeds to finish the project off, we’re not going to get into it.

HUDFORECLOSED.COM: Does the experience of the buyer matter?
JM: Sure, we like experienced investors. But if someone new to this brings us a solid deal, where the numbers are right and so on, lack of experience is by no means a disqualifier.
The things we tend not to like are, for example, where there are too many unknowns about the house. If we don’t know the condition of the foundation, or there are abatement issues where the city may have concern (such as unpermitted additions, or building that is not to code, etc.), that tends to discourage us from pursuing it.

HUDFORECLOSED.COM: Do you work nationwide, or locally?
JM: JMAC Financing focuses on California; Southern California primarily. There are hard-money lenders that work nationwide, but in my opinion you’re better off with someone who understands the local market, someone who’s local to you and can fund you fast. My opinion is that you don’t get the same level of service when you work with nationwide lenders.

HUDFORECLOSED.COM: What does a buyer need to have by the time they contact you?
JM: They need to have the deal in contract. That means the property has been inspected, a price has been agreed upon, the purchase is ready for financing.

HUDFORECLOSED.COM: But what happens if you can’t agree to fund their deal?
JM: We always recommend the buyer sets up enough contingencies in the contact that they can walk away from it without legal liability. Say the inspection yields unfavorable results, something major wrong with the house; you’d walk away, right? And your contract needs to say that. But as they come to us with a deal in contract, and they still have fourteen days or so to do the inspection and so on, we can get them funded in as little as three days.

HUDFORECLOSED.COM: That is a VERY short time!
JM: Three to ten days is normal. Five days would be a good average. Of course sometimes there are unforeseen items, but that’s the norm.

HUDFORECLOSED.COM: How much do you normally finance?
JM: I’d say from $30,000 to half-a-million. The higher range usually means we’re financing commercial property though. For residential homes, here in Southern California, we normally see deals where the market value is around $200K to $400K.
We like for the buyer to come ready with the downpayment and money to do the rehab.

Let’s say a property is selling for $200,000 – the buyer has $40,000 for the downpayment and $25,000 for the repairs; we inspect the home to ensure that the numbers line up and the project is viable, and then we’d finance the remaining $135,000. But that also varies – if someone has worked with us through a few deals and they’ve proven solid, reliable projects, we’ll be quite flexible with that buyer.

HUDFORECLOSED.COM: Jim, how does someone become a hard money lender?
JM: (laughing) Well that’s another story. But typically it’s someone that has acquired some wealth…

HUDFORECLOSED.COM: So potentially someone who has been buying and selling REOs for a few years could find themselves becoming a hard-money lender?
JM: Sure, that seems likely to be the evolution. Once you’ve achieved a level of wealth you look for a different type of investment, and helping buyers is a natural progression.

HUDFORECLOSED.COM: Thanks Jim! I'm sure our members will find this useful.
JM: No problem. And do tell your members that prices are beginning to climb back up. If your members want to benefit from this unique market, they better look for a deal now.

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