Residential rehab presents unique financing challenges for investors. You need a lot of capital up front, and enough on the back-end to make sure your project doesn’t flounder. A loan is usually required to jumpstart your rehab and get work done. But conventional loans require a lengthy approval process, strict adherence to approval criteria, and significant down payments that leave the investor strapped for cash once they have acquired the property and renovations begin. Hard money loans were developed to fill this gap in the lending market.
Bridging the Lending Gap Between Acquisition and Refinancing
Conventional loans require larger down payments than hard money loans- lenders are going to expect you to pay 20-25% down to acquire the real estate. After the initial acquisition, fix-and-flip developers still need capital to cover the up-front expenses involved with renovating an older property enough to get it into a salable condition that’s attractive to prospective buyers. For most investors, it’s just not really feasible to uses conventional financing and then pay for the entirety of the renovation out-of-pocket.
This is where hard money loans, also referred to as “bridge loans” or “construction loans”, step in. They can be an indispensable tool in your financing toolbox. With a hard money loan, you could acquire the property with as little as 10% down, renovate it, then shop for permanent financing.
Following renovation, the property value should have a higher appraisal value, ideally high enough for the refinance to cover the original loan and closing cost, without spending any more out-of-pocket. A conventional lender might offer a refinance for 75% of the new appraisal value.
When you’re a fix-and-flip developer and in the business of acquiring distressed property, closing the deal can be time-sensitive. Conventional bank loans are under significant regulatory restriction, require extensive paperwork for loan-approval, and loans could take a month or two to secure. Hard money loans can be approved within a week, in some cases even the same day. It’s a viable financing route to get your project rolling with minimal red tape.
Unlike conventional lenders, hard money lenders get to operate under their own, individual loan criteria. In the residential rehab market, a lot of the homes that investors are looking to acquire don’t meet FHA guidelines, which means lenders can’t write the loans through Fannie Mae or Freddy Mac. This makes it impossible to acquire conventional financing.
Hard money lenders have the freedom to overlook many of the regulatory constraints that banks face, which lets us approve buyers quickly and make a much more holistic assessment of borrower’s credit. Hard money lenders like Socotra base a borrower’s approval on the merits of the project, agreeing on a viable exit strategy to pay the loan off before its maturity date, and the borrower’s experience working with the type of project that they’re tackling with the loan. If you have a less-than-celestial credit rating but you have a reasonable explanation for it, hard money lenders can overlook that and issue a loan anyway. It’s a much more pragmatic approach than you encounter with conventional lenders.
Socotra Capital is California’s premier hard money lender for your real estate investment needs. Contact us today to get started on your quick approval!