Sean Pan – How Hard Money Loans Work ft. Justin Chang Ep. 248

Synopsis

Justin is an aspiring real estate investor that resides in Southern California. He and Sean first met at UCLA when they were both members of the university’s dragon boat team. He contacted Sean, a hard money lender, seeking advice on utilizing hard money loans in flipping properties. Unlike the usual episodes, where guests answer essential questions about their areas of expertise, Sean will be the one to answer Justin’s questions about hard money loans in this one.

Key points

How He Started

Justin graduated from UCLA with a degree in mechanical engineering. He and Sean both worked at Northrop after college. As a mechanical engineer, Justin had always wanted to undertake construction work, so when the opportunity came up to help remodel the Redondo Beach house of a friend, he jumped at it. He enjoyed the process of transforming an old, dilapidated beach home into something modern and beautiful with his own hands. After that, he bought and renovated his own house in Marina del Rey. Even though he had to spend 10 to 12 hours a day on the project, it was an incredible learning experience for him. Six months later, he was contacted by friends who were buying houses and asked if he would renovate them since they admired the work he had done on his. He was on his path to becoming a successful real estate investor after that.

Hard Money Loan

To begin, how much money do you have to put up as collateral to get a hard money loan? Depending on your expertise, credit score, and the company you’re working with, Sean believes this question has a dependent answer. In Sean’s case, as a nationwide lending institution, their company’s rates will be competitive because they have an unlimited amount of funds. However, they adhere to certain guidelines, whereas other hardware lenders don’t care as long as you have a pulse, they’ll let you have the loan, but they’ll charge you a high-interest rate.

The lowest price for a hard money loan is 6.5% for a top-tier borrower, but the firm will almost certainly lose money on that deal, so most companies will settle in the 8% range, particularly if you’re a new investor. In addition to the annual interest-only rate, lenders often impose points. To get a loan, you’ll have to pay a percentage of the loan amount as well as points, which are essentially an origination fee. When you borrow money, you’ll usually hear that the hard money loan is 8.5% and one point, which implies that your 12-month interest-only rate is 8.5%, and you’re paying 1% of the loan amount upfront. In Sean’s case, their company charges new investors roughly 8 to 9% plus one and one-half points.

Experience

Since hard money lending relies on experience, how would you define experience? According to Sean, it varies with each firm, but it is determined by the number of properties with your name appearing on a title search for their company. Some are asking, “What if I have an LLC? Does it count?” Yes. Sean stated that there would be a title search on the LLC to discover all the properties.

Points

Most upfront closing expenses include title, escrow, notary, and origination fees. For example, suppose you have one point, and the loan is for a million dollars; one point of that is $10,000. In Sean’s case, their firm will only lend you $990,000 but will say you owe them a million dollars.

Rehab Loans

Every lending company deals with rehab loans differently. Sean mentioned that for their company, they have a form that they’ll require you or your general contractor to fill out when applying for a rehab loan. To verify that these statistics are within the range of possibility, they’ll submit it to a third-party business for a feasibility study.

When you request a reimbursement, they’re called draws, and as the investor, you will decide how many draws you want to do. Next, you need to send the draw request to the lending company, and then they’ll send an inspector over to take photos. Afterward, the corporation will pay you back per the percentage that you’ve agreed upon. It takes roughly a week to complete the entire procedure.

Loan Term

Since there is a pre-payment penalty period, longer-term loan rates, such as 24 months, 36 months, and 60 months, are more favorable. According to Sean, for their company, the 12- and 18-month loans have no prepay penalty.

Money Distribution

When it comes to money distribution, lending companies are usually in the first position. When you sell the property, the person in the first position gets paid first, and the remaining is what you keep as profit. In terms of taxes, you’ll only be taxed on your profit.

Limitations

As long as you have the financial means to finish the deal, there is no actual limit, although Sean suggests starting slowly and making sure you have the liquidity to handle the loans.

Partnership

In the case of short-term hard money loans, having a partner is beneficial because you can pool your finances to show liquidity. For example, if you only have $100,000 on your own but combine your funds with a partner to make a total of $200,000, you will be granted a better deal.

Cash offers

People prefer cash offers not because they actually want cash but because they want a seamless procedure without random things being canceled at the last minute. Hard money loans meet that requirement and depending on your agreement with the lending firm, you may close a deal quickly.

References

More from our guest

• If you have any questions about hard money loans, feel free to contact Sean by email at Sean@EverythingREI.com, and he will be pleased to answer them.