Investors Seek Rehab Funding From Hard Money Lenders
Investors across the United States are continuing to acquire excess lodging stock, the demand for private hard money has continued to accelerate. Various types of programs have been designed to facilitate these property transactions by investors. Programs such as rehab hard money loans, transactional and flash support, and traditional hard money for short term property acquisition, have become the norm for real estate investors as a method of buying and selling property.
Most of the time a rehab hard money lender focuses on providing the investor with funding alternatives to acquire property at discounted rates. The investor then may be allocated an additional sum of money to consummate rehabiliation or repair of the property. The money is mostly placed in an escrow account that is drawn upon by the investor as repairs are completed. The private hard money lenders generally requires that the investor have prior experience in rehabbing property to insure that the borrower is prepared to complete the deal and repay the lender according to terms.
The creation of opportunity of the transactional lender was in response to the need for short term or “flash” funding to give an investor the chance to secure wet funds to legally facilitate an A to B to C transaction. In this example, A would be the seller of the subject property. B would be the investor who purchases the property from A. And finally, C would be the end buyer acquires the property from B. The C buyer is typically a homebuyer with traditional conventional mortgage funding although in some cases it may be a wholesale buyer who purchases the property at a substantial discount with the aim of reselling the property or establishing it as a long term renting unit. Transactional funding has enabled legal closings in which full disclosure is made to all parties and has facilitated short sales and REO purchases by investors as well. Some financial institutions have attempted to prevent these types of transactions by imposing seasoning rules. However the general sentiment is that the seasoning requirements are being relaxed as financial institutions have come to learn the benefits of these types of transaction and recognizing them as legitimate.
In as much as , a traditional private hard money lenders funds and closes a purchase for resale, which in investor vernacular, is known as a “flip”. These loans have higher interest rates and points than traditional loans, however the return to an investor who uses these loans can be substantial and offset the higher costs of money. Some of these loans are made to be “no payment” loans whereby the borrower does not make any payments for the life of the loan, which could be anywhere from 3 to 12 months and then pay the balance in full, with interest. Another option is the “interest only” payment which enables the investor to make a the minimum payment required to enable the lender to have an adequate cash flow and keep the borrower in a pay back mode.
The relationship between private hard money lenders and real estate investors will continue to develop. Banks and conventional mortgage companies are still on the sidelines as the real estate markets continue to stabilize and it is expected this economic relationship will continue for years to come.