So called “Hard Money Lenders” are what are also known as predatory lenders. This means they make loans based on the premise that the terms to the borrower need to be such that they will gladly foreclose if needed. Conventional lenders (banks) do everything they can do to avoid taking back a house in foreclosure so they are the true opposite of Moneylenders Act.
Within the good old days prior to 2000, hard money lenders virtually loaned on the After Repaired Value (ARV) of a property and the percentage they loaned was 60% to 65%. Sometimes this percentage was up to 75% in active (hot) markets. There wasn’t a lot of risk as the real estate market was booming and money was very easy to borrow from banks to finance end-buyers.
If the easy times slowed then stopped, the difficult money lenders got caught in a vice of rapidly declining home values and investors who borrowed the money but had no equity (money) of their own in the deal.
These rehabbing investors simply walked away and left the hard money lenders holding the properties that have been upside-down in value and declining every day. Many hard money lenders lost everything that they had as well as their clients who loaned them the amount of money they re-loaned.
Ever since then lenders have drastically changed their lending standards. They will no longer look at ARV but loan on the purchase cost of the house which they need to approve. The investor-borrower should have an acceptable credit rating and place some cash in the deal – usually 5% to 20% depending on the property’s purchase price and the lender’s feeling on that day.
However, when all has been said and done, Moneylender Act Singapore still make their profits on these loans through the same areas:
The interest charged on these loans which may be anywhere from 12% to 20% depending on competitive market conditions between local hard money lenders and what state law will allow.
Closing points would be the main income source on short-term loans and range from 2 to 10 points. A “point” is equivalent to one percent from the amount borrowed; i.e. if $100,000 is borrowed with two points, the charge for that points is going to be $2,000. Again, the quantity of points charged depends on the sum of money borrowed, the time it will be loaned out and also the risk for the lender (investor’s experience).
Hard money lenders also charge various fees for almost anything including property inspection, document preparation, legal review, as well as other items. These fees are pure profit and should be counted as points but are not because the blend of the points and interest charged the investor can exceed state usury laws.
These lenders still examine every deal as if they must foreclose the financing out and go ahead and take property back – they may be and always will be predatory lenders. I might guess that 5% to 10% of hard money loans are foreclosed out or taken back having a deed in lieu of foreclosure.
So with the exception of the stricter requirements of Moneylender License Singapore, there have been no fundamental changes as to how hard money lenders make their profits – points, interest, fees and taking properties back and reselling them.
These lenders also consider the investor’s capacity to repay the loan each month or to make the required interest only payments. If you visit borrow hard money, anticipate to need some of your own money and possess lmupww in reserve so that you can carry the loan till the property comes.