Hello, again. I some questions about the distribution of funds in the Hard money loan transaction. I will present a example to illustrate my concerns. I will appreciate if any hard money lenders in the forum can provide me with a response.
Property A
As-Is value $100,000
ARV-$178,000
Cost of Repairs: $35,600 (20% of property’s ARV)
Now I have read that HML’s will loan 65% of A.R.V. The investor will be entitled to obtain a loan amount of $115,700. The investor will receive at closing $65,000. (65% of the As-Is Value) The rest of the money will be placed into an escrow account for repairs.The difference beween the A.R.V. and As-is value will be placed into escrow for repairs.
Escrow money-$50,700
My questions are the following
Since the repairs only added up to $35,600. Is the investor entitled to the monies left over when you subtract the repair money from the escrow money?
Is this scenario highly unlikely due to the amount of money held in escrow?
Since the escrow money greatly exceeds the repair money, would the lender decide to loan the money out at at a lower LTV?
Is this the general format that a HML uses to allocate funds?
I cannot answer for any other HML, but I can tell you how we do it.
At closing, we would disburse 65% of the ARV, less repair funds which are escrowed.
In this case, our loan would be $115,700. We would escrow the $35,600 in repairs. Funding at closing would then be $80,100. If the purchase price, which you did not list, was less than this, you could apply the difference up to the amount of closing costs. If it was more, you would have to make a down payment of the difference.
I cannot give you any better explanation until you tell me the purchase price. We do not care about the as-is value, only the purchase price.
The usual rule of thumb in the industry is for purchase price plus repairs to not exceed 65-70% of ARV, although this may be difficult in some hot markets.
Thanks Welowe for the response. In the scenario, the purchase price of the property is $85,600. According to the information you have provided, I will have to provide a down payment of $5,500 to make up the difference. (In conjuction with other down payment cost such as points to secure the loan).
Also, what are the variables that influence the amount of points charged on the loan? I have read that most HML’s charge 3-5 points to secure the loan. Is the amount of points charged positively correlated with the loan amount?
Example: Higher loan amounts would result in the investor paying higher amounts of points to secure the loan.
I did not know that you can opt to add the points to the loan, increasing the LTV of the A.R.V. This allows greater flexibility to enter deals with less capital. Welowe, thanks again for the advice. I really appreciate it.
Bill’s answer is succinct and fairly representative of most direct HMLs.
This is the way we would address this same scenario:
ARV-$178,000
Cost of Repairs: $35,600
Max Loan: $124,000 (70% of ARV)
Rehab Escrow: $35,600
Max amount allocated for purchase: $88,400
Without knowing what the purchase price is I am unable to show the balance of the funds allocation. However if the purchase price was $85,000 then you would be able to roll in $3400 of points. We allow borrowers to roll as many of the origination points as possible not to exceed 70% of the ARV.
Thanks DHLC. From your response, you will allow the borrower to add the loan origination fees (points) into the loan pending provided it does not exceed 70% of the A.R.V of a property (70% of the A.R.V. is the max amount of money that your instituion will provide to an investor). I think I got it now. This flexibility provides the investor the ability to enter the deal with less money out of pocket. The other consideration that an one must consider is the less money that you pay out in loan origination fees, the higher the monthly payments on the loan. Thanks again DHLC. Happy investing.
That is true to a point. However that amount of interest on the reletively small amount of extra (the points) financed in minimal. In this example of rolling in $3400 of the points, @ 14% Interest Only that would only add approx $40.00 to your monthy payment
Thanks again for all the information DHLC. An addition of forty dollars to the monthly payment is a small price to pay for a much bigger payday. All the information that you have provided has removed many doubts I had about the Hard money loan process. I apppreciate the good fortune that you have extended to me and I hope that your wealth pertpetuating endeavors are lucrative.
HMLs are in the business of making loans. However they are not in the business of making “bad” loans. We use one of our approved appraisers to determine the the ARV based upon the scope of work and the actual market. The ARV is an accurste valaution based upon the scope and current market condtions.
I cannot answer for any other HML, but I can tell you how we do it.
At closing, we would disburse 65% of the ARV, less repair funds which are escrowed.
In this case, our loan would be $115,700. We would escrow the $35,600 in repairs. Funding at closing would then be $80,100. If the purchase price, which you did not list, was less than this, you could apply the difference up to the amount of closing costs. If it was more, you would have to make a down payment of the difference.
I cannot give you any better explanation until you tell me the purchase price. We do not care about the as-is value, only the purchase price.
The usual rule of thumb in the industry is for purchase price plus repairs to not exceed 65-70% of ARV, although this may be difficult in some hot markets.
So if the purchase price exceeds the loan money - what type of down payment can the buyer put down - a note? or cash? or pledged asset?
