The Difference Between Hard Money and Bank Loans
Bill Fairman (00:10):
Hello. Thanks again for joining us on our latest edition. Welcome to the show. My name is Bill Fairman and this is Wendy Sweet, my lovely sister and business partner. So we’re going to talk today and Oh, first of all, like and subscribe. We need likes. You need to subscribe to our show. Our website by the way is CarolinaHardMoney.com so initially this episode we’re going to talk about the differences between a hard money loan and a bank loan. And while they’re both necessary. Yep. At what parts or place in time are they necessary?
Wendy Sweet (00:40):
Right. Well people ask me that all the time. Um, you know, why would I not get a a conventional loan? First of all, you need to understand what a hard money loan is, right? So hard money is a short term, high interest loan that allows the borrower to buy a property and fix it up. So the way the hard money loans work is they are based off of what the after repaired value would be, not what you’re purchasing it for. But what the after repaired value would be, we take a list of the repairs that you’re going to do to a house and then we turn it over to an appraiser and they do an appraisal based off of those items being completed. Once that is completed, then we take 70% of that amount, what it would sell for, and that’s what we base the loan off of.
Wendy Sweet (01:37):
Is that up to that amount. So we lend you all the money to buy it and all the money to fix it up. As long as you’re under that 70% if you’re going through a bank, a bank is going to lend you view based on what you’re paying for the house. If it’s an investor house, you’re going to have to put down 20% at least in some cases, 25 right? That’s if they’ll lend it to you at all. Yeah, because they can’t, can’t need work. Right. If there’s too many repairs that needed to be done, they won’t do the loan at all. That’s exactly right and that is the key is, you know, bank financing is great, the interest rates are low. It’s, it’s you know, something you can stay in longterm. If you’re a buy and hold kind of person and, and you want to get a bank loan where you’re going to buy that house and rent it out and your repairs may only be, you know, 5,000 or maybe even $10,000 it’s not worth it really to get a hard money loan for something like that.
Wendy Sweet (02:31):
You’re better off using your own cash to go ahead and do those repairs. And of course it depends on how bad those repairs are. If you’re replacing cabinets or fixing up countertops and that kind of thing, that’s, that’s fine that a bank doesn’t care about that they don’t like holes in the ceiling. Right. Floors that are really not in the roof. The roof that’s, that kind of hurts dry. They don’t want to see, you know, bathrooms that have been Lincoln leaking for 20 years and there’s, there’s a hole in the floor, the bathtub will fall right through or, and you know, you’ve got plumbing that isn’t working at all. The HVHC has to be working. It has to be livable for a bank to do the loan, you have to be able to live in it. So you know, even the windows can’t be busted out.
Bill Fairman (03:18):
Don’t get me wrong, you can get bank financing for a rehab, hence, but in most cases it’s not going to be investor financing unless you get a commercial loan to do it. Right. And at the same time, let’s talk about time.
Wendy Sweet (03:36):
Yeah. It takes banks just a little while longer to do alone. You know, you’re looking at 30 to 45 days for them to underwrite and get that loan closed where hard money, it’s two weeks or less. That’s the key. The thing about hard money is the speed and being able to get the money for the repairs on that house right
Bill Fairman (03:57):
back when it was a buyer’s market, it was okay to take longer because people weren’t buying houses up like an hour. Now, now inventory is really tight, right? And you, you’re competing with cash buyers that can just write a check tomorrow. So you have to get the hard mail. I know. I want to mention one thing you you keep stressing high interest and it is a high interest loan. Yeah, but it’s also interest only loans. Yes. The interest is based on 12 payments. It’s an annualized loan. So you’re talking annualized meeting throughout the year. So there’s 12 payments. So if you had a 12% interest rate and you only made six payments, what’s your interest? How much interest did you pay? It would be half of whatever. That would be six. So it’s not as high as you think it is, but the rate of interest is high. Again, it’s speed. If you kept it for 12 months, it’d be it’d be 12% if you kept it six months, it’d be 6% guess what? If you knocked it out in three months, he was paid 3%
Wendy Sweet (05:09):
that’s right. That’s exactly right. That’s exactly right. You’re bringing less money out of your pocket when you do a hard money, right. For a bank, you’re going to have to put that down payment. Usually 20% for an investor loan, in some cases, 25% but with a hard money loan. With us doing a hard money loan, the only thing you’re bringing to the tables are the closing costs, about seven to 8% of the total loan amount is what you’re going to bring. There are some hard money companies out there that will lend you maybe 90% of your purchase price and 100% of the rehab or they might lend you 90% of the purchase and 90% of the rehab. It really depends on the hard money company. Right?
Bill Fairman (05:51):
And yeah, and in reality we might require you to have 10% down. It depends on the, it might be far, far out in the middle of nowhere. When you’re, when you’re doing a hard money loan, we look at everything globally, your income, your the assets you have, you know the many that you have in the bank, your credit, we care about your experience, the property itself, we’re looking at all that and we’re making a risk assessment on the entire project. And if you’re off a little bit over here, you have other things over here that can make up for it, right. And sometimes we have to make a deal. It’s a little bit outside of our comfort zone. Comfort. It’s a little bit outside of our comfort zone. So we’ll make up for this by perhaps you bring in a little bit more money.
Wendy Sweet (06:45):
Right, right, right. Yeah, so if the population is really low, which means if we have to take it back tomorrow, remember that’s how we think. We have to take it back tomorrow. It’s going to be harder for us to sell it because there isn’t as large a target market in Podunk North Carolina as a, as a comfort North Carolina. That’s right. As opposed to, you know, being in downtown Charlotte. It just, it makes a big difference as to where that’s located. The the other thing that we really care about is your ability to pay it back. We’re underwriting the borrower just as hard as we’re underwriting the house itself. So we care about that. That’s what we care about. Other hard money lenders or the same way they’re there. We’ve all kinda got thought in mind is how long is it going to take us to sell this?
Wendy Sweet (07:31):
If we have to take it back tomorrow were we all kind of think down that same path. And you know, although we require payments on a monthly basis because we want our borrowers to have to write a check every month, we want them to really think about, Hey, I’m paying for this. I need to get this house finished and get out of this loan. Where there are some lenders out there though that won’t require you to make a payment during the time that you have that loan and they’re going to allow you to pay it at the payoff. Understand, you’re probably going to pay more on an interest rate and they’ll probably lend you less money, but it might be something that works for that particular deal that you have, right?
Bill Fairman (08:10):
Well, we want you to have in your head, I need to get this done quickly because the longer you keep a deal or a loan out there working, the more overhead you’re paying. Right? So there has been instances where we’ve had people say, for example, I’m not going to take this offer because I can get $1,000 more. They didn’t take the offer and it took them two more months to sell it and it cost them three grand more to sell the house so they got that price up. Thousand dollars.
Wendy Sweet (08:56):
Bird in the hand. It’s a bird in the hand.
Bill Fairman (09:00):
One of the things we love to encourage people to do is to look for private money in your local market or from your local sphere of influence. Private money is going to be less expensive than working with a hard money company like ourselves or anyone else because we have a business, we have overhead, we have employees, we have to make a living, a private lender. In most cases it’s going to be someone who has an IRA. They’re looking for a greater return. They can lend that money to you. That said, most private lenders do not have infinitely deep pockets and eventually they’re going to run out of money or there’s an opportunity that comes on the line. And this is why we tell people to use hard money instead of their own money or a bank because opportunities come along and if all your money is tied up in another deal, you can’t take advantage of the new one that comes up. And having hard money lenders in your back pocket allows you to scale your business. If you had, for example, $100,000 and you can use 25,000 you know, four times,
Wendy Sweet (10:21):
Bill Fairman (10:22):
on four different houses or you can use $100,000 on one property, which one is going to make you more money, even if you’re paying finance charges and interest and why not? Well, obviously it’s going to be the four that that you can get.
Wendy Sweet (10:37):
Right, right. And do you, you said something really important that you did. It was just one thing. Just one thing. So it’s having, you said hard money lenders in your back pocket. I don’t really love that term that he uses. Really it’s about a relationship. It’s you. You need a relationship not only with hard money lenders, but you need a relationship with private money lenders and a relationship with banks. It’s important to use all of those options when you’re investing and, and what I think is really cool is houses or investments I should say are, they all have their own little personality. They all have their own little deal. It might be a great seller finance deal, right? Where the seller’s willing to finance a good majority of it. You use a private money lender to put down the down payment, share that down payment with you. There’s so many different ways that you can put a deal together and it just matches whatever works for that particular property. Yep.
Bill Fairman (11:39):
I take the opportunities as they come and you’re choosing the opportunity that makes the most sense for that particular deal.
Wendy Sweet (11:46):
That’s right. And and really well, how do I find a private money lender? It’s not like they have websites and they don’t. So really the best way to meet people like that is get involved in your local real estate investor group, whether it’s through the National REIA or meetup groups that you have in your city. I lead a group in Charlotte that’s been going on for 17 years now called Sunrisers. It’s a faith based group. We have anywhere from 50 to 55 people that show up there every week for breakfast and it, you know, we do a five minute devotional and then we have somebody coming in and talk about real estate. Yeah, well that too, but like this past week it was based on IRAs. This week coming up, it’s going to be somebody that’s doing multiunit properties for college kids. So it, there’s just all, yeah, student housing. I knew I had a professional word that sounds so much better. So, and we’ll, we’ll do one on short term vacation rentals or executive rentals and commercial buildings. All kinds of stuff like that. And you host a group once a month, right?
Bill Fairman (12:56):
Yes. It’s called the Rock Hill group.
Wendy Sweet (12:58):
Yes. And he serves pizza.
Bill Fairman (13:01):
It’s the Rock Hill subgroup of the Metro Atlanta area and we have it once a month and we have a pretty good ground. We haven’t in our conference room, there’s typically 15 to 20 people come and I encourage you to get a t-shirt printed that says “Need Money”. And then if you have money to lend, get a t-shirt and it says “Got Money”.
Wendy Sweet (13:25):
Yeah, you got to ask, right? Yeah. You’ve got to ask[inaudible]
Bill Fairman (13:31):
You go to the, your first meeting to meet somebody and you’re asking for money. You’re not getting any money. Everything you do in real estate, well, any business for that matter is relationship. Unless you’re selling products on Amazon, it’s a relationship business and people need to get to know you. Don’t, don’t rush it, don’t push it. Learn as much as you can. Get to know folks, let them get to know you and you’ll be amazed at the opportunities come our way. They, they only, anything else I’d like to. And on the, the difference in the bank loans is the amortization. So with the most hard money loans, they’re going to be similar to Atlanta credit, although it’s not a revolving, well Atlanta credited, they’re still both interests only and your bank loans are going to be, you know, fully amortize, which means a certain amount of money is going towards payment and a certain amount or towards principle, certain certain amount of money is going towards interest. When you’re dealing in Atlanta credit or hard money loan or a private lender, you’re not paying any principle, you’re just paying interest and then when you refinance or when you pay it off, you’re paying all the principal back at one time plus any interest that you owed in the, in the mean time.
Wendy Sweet (14:47):
Right. And check for prepayment penalties. That’s really an important question to ask.
Bill Fairman (14:52):
The vast majority of hard money lenders on residential loans are not going to have a premium ability, but you still need to look. It is more typical on a commercial piece of property. They multi-tenanted, let’s just say office building or mixed use or self storage or multifamily. They are typically going to have a prepayment penalty so that there’s something that you need to look at before you make any deal.
Wendy Sweet (15:20):
That’s right. And I always, I always pushed seller financing if, if you don’t know if you can get seller financing unless you ask, you need to find out what the seller’s going to do with the money and you don’t know that unless you ask. So again, it’s about even building a relationship with the person that’s selling you that property or that building. Or what about finding out,
Bill Fairman (15:42):
well, seller financing. If I wrote you a check for $100,000 and I put the pile of a hundred, if I put $100,000 cash here on this table, would it, would it, would it be either next year, John Graham or CPA in business coach? Yeah, in after they chuckle about it and they say, well, you know, I’m using it for my kid’s tuition or whatever. We needed 20,000 for that. I mean it could be, you could make them payments.
Wendy Sweet (16:13):
That’s right. There’s always a way to put into place the best option for the financing for that particular house. And there’s no one way to get it done. Did we cover everything you think we did? So if you liked it like us, please like and subscribe to our website CarolinaHardMoney.com
Bill Fairman (16:35):
subscribe to our podcast if you haven’t already. Share on your social media. Tell all your friends. Yup. And the next show that we’re going to do, we are going to cover what, how we help investors. No, we’re going to talk about IRAs and the best place to put IRA money.
Wendy Sweet (16:56):
But I don’t want to talk about IRA money. No, I’m just kidding. We’ll be happy to talk about IRA money. That’d be a great one.
Bill Fairman (17:00):
Yeah. All right. Cause there’s a lot of different strategies involved in, IRA money. The HSA is covered. Dale account. Yeah. There’s all kinds of stuff that can be self directed that people don’t know about. And one of the things you find if, if you want to become a lender, and by the way we’re happy to teach you how to become a lender. And one of the things you have to know as a lender is all about IRAs and how they work. You have to be almost as much of an expert as the IRA custodian is. That’s what I was saying anyway. It was a lot of fun. Thanks again for joining us and subscribe like CarolinaHardMoney.com
Wendy Sweet (17:43):
hi. If you really liked this show, what you can do is you can check out some of our shows that might
Wendy Sweet (17:50): or might not pertain to it. You can check up there, you can check over here. You can check down here, check it out. Don’t be afraid to like us, right? Subscribe! Do that too. Subscribe to our page and hit like we’d love to have you do that. Thanks