If you have been following this column all month, you would know that I have been writing about the fix and flip business as well the fix and rent business. If you would like to re-read any of those columns, you can do so at www.coloradodreamhouse.com/blog.
This week, I want to write about a sub business that has developed in the last few years to help the fix and flip guys buy property without all the lending hassle. It’s called “hard money lending” and it’s been around for years, but it just recently gained enormous popularity because of the new stringent guidelines associated with getting home loans. People with a fair amount of cash on hand or a warehouse line of credit have been lending money out to investors of income properties. Here is how it works:
Let’s say that you are a fix and flip guy and want to buy a house quickly to renovate and re-sell. You may be able to make a cash offer to a seller with no appraisal, no inspection, no survey, and a 10-day close. That would be attractive to most sellers and they may likely take a low offer in exchange for the terms you have offered. What the investor does is that he borrows the money from a hard money lender. This individual usually charges 12-16 percent interest on a short-term six-month loan (assuming that you will sell the property in six months or less). He most likely will charge 1-4 percent up front (points) on the amount of the loan. Sound expensive? Yes, it can be, but it needs to be factored into your business model. If you are buying the home right (meaning low) and you are selling it high, the lending fees just become a part of the overall expense of the project. The key here is to fix it in 30 days or less and sell it in 30 days or less. What happens if you get caught at the end of six months and you’re still not able to sell the house? Be prepared to find another source of financing because the note becomes one big balloon payment. If you can’t pay, chances are that the hard money lender will take the investment home.
This has become a big business and I am working with more hard money lenders these days than I am with traditional lenders. This may be an option for you to start a business or it may be an option for you to purchase that investment home.