Hard money rehab

Information for hard loans on rehab purchases and refinance of real estate 


Hard money rehab definition :

Hard money rehab loan is hard loan for the purpose of rehabbing a property for resell or for income producing purpose. The portion of the hard loan proceeds related to the rehab project can be either:

A. release to the borrower at time of close escrow or

B. Held by Escrow to be released in one lump sum upon completion of the rehab, or

C. Held in escrow fund control to be release in pre-determined stages.

On small rehab project the private investors prefer to either release it all at the end and thus eliminate the necessity of mid-construction inspections. On bigger project option C is often used.

Calculating Loan To Value on hard money rehab loans

The calculation of the LTV is done based on present market value and also on future value called After Repair Value of ARV. Because of the inherited risk connected with any construction job the hard lenders will normally reduce the ltv by 5%-10% and will also  insist that the borrower have some "skin in the deal" . In most cases private investors will not finance 100% of the deal regardless of LTV  but will require 10%-30% borrower skin as cash calculated fro m the present appraised value and the ARV. Also required the ability of the borrower to demonstrate how he is going to rehab the place the source of money and his experience in similar projects.

 E.g. Jo purchases an fixer reo for $100,000.  The appraised ARV is  $200,000.  The lender will approve a loan between $70,000 to $90,000 and may require to see evidence of the borrower  additional cash that will be needed to finish the rehab. If the rehab work requires major construction like room addition  the investor may decide to hold $20,000-$30,000 in escrow fund control to be released in stages or at once upon completion. See more at Fix and Flip total plan  .

Hard money loans formula exceptions

 Since all hard money are done privately there can many exceptions and variation. In order to get a loan some investors will go higher than 100% of purchase price if they are familiar with borrower and know that the borrower will come up with cash and or sweat equity to rehab the property. Another creative financing is to cross collateral the rehab property with additional property which has a lot of equity thus reducing the investors risk while allowing the borrower to borrow 100% of the money he need to rehab the building.  In some cases the private hard lender will agree to release the additional collateral property from the security instrument after the rehab property is completely completed and thus enable the borrower to repeat his successful rehab project on a new property. Cross collateralization also known as umbrella  loan is not uncommon on hard money rehab and it often is an excellent solution to involving parties

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