Gary O. Shelton, CEO, GOS Companies 09/18/2018
Often investors use hard money mortgage funding when buying a home that needs to be renovated before it can be sold. Typically, hard money lenders will only loan you up to 70% ARV (after repaired value). This means that a hard money lender can loan you up to 70% of what the home is worth in repaired condition. So if you find a home worth $45,000 in the condition it's in, and needs $20,000 in repair work, and after it is repaired the current fair market value is worth $100,000, then typically they can lend you up to $70,000, which would cover the cost of the house and the repairs.
Other terms you can expect are high interest rates. Interest rates vary from 12% - 20% annually and terms can last for 6 months to a few years. Many times these rates vary depending on your credit score and experience. In most cases, there will be closing costs or fees to use hard money. Typically hard money lenders will charge anywhere from 2-10 points just to use their money. One point equals one percent of the mortgage amount. So charging 1 point on a $100,000 loan would be $1000. These are all important things to consider when financing your next project with a hard money loan.
Considering these costs and terms, you might wonder why investors use hard money loans. Dusty Brazil at Refi Guide says “bank financing for fix and flips is more challenging than a decade ago, but it still can be an option for experienced investors. Generally, you will need to have two years of experience fixing and flipping homes,
have a portfolio of properties for collateral, and a high credit score. Also, you need to have a registered fix and flip company and have cash to put down for down payments.”
Simply put, most house flippers can’t get approved for traditional bank financing. “If you’ve got a solid credit score, you may be able to get a fix and flip loan through a bank, although this doesn’t happen very often.”-Smart Asset The difficulty of getting approved for a bank loan drives house flippers to hard money lenders.
However, Carol Tice wrote in Entrepreneur, ” New reports are that so-called "hard money" lending is on the rise -- and small businesses' use of hard money threatens many of these business's very survival. Long a frequent lending source for real-estate speculators, hard money has been inching into more mainstream small-business life. In this arena, it's sometimes known as "merchant cash advances."
Considering the near impossibility of getting a bank loan and the expense of hard money loans I recommend an out-of-the-box strategy. When house flippers meet the following credit criteria*, with no money out-of-pocket, and no proof of income they can obtain a $100k line of credit within 30 days:
1. 3+ Years of Clean Credit History (Ideally 5+ Years): 2. No Derogatory Items or at least none in the recent past 3. 3+ Open Revolving Credit Accounts: 4. 30% or Lower Revolving Debt Ratio: 5. 680+ Credit Scores (Ideally, 720+): 6. No More Than 6 Inquiries per Credit Bureau in the last 6 Months: * If you don’t meet the credit criteria, you should implement a credit restoration program
How The Strategy works
Step 1: GOS Companies gets you five credit cards each with a $20K limit for a total of $100k
One of the credit cards, we call it a conduit card, offers cash advances for the entire card amount with no fee
The other four cards offer 0% balance transfers for up to 20 months
Step 2: take a cash advance on the first card, this puts $20K in your checking account and leaves a $20K balance on the card. This is as easy as calling the number on the back of the card or writing yourself a check.
Step 3: call the number on the back of one of the other four cards and tell them you want to take advantage of their 0% balance transfer offer.
Step 4: Repeat the process
At the end of the process, you can have $100,000 in your checking account and $100,000 in credit card balances at 0% interest.
Step 5: When you flip your property pay off the credit card balance
Dispute the credit card balance with the credit bureaus and force them to
update the score Start the process all over again with credit scores back to where they were
Smaller payments that all go to the principal Unsecured - good for Real Estate especially Can be used over and over Access to money with just a 680+ FICO score Can be done without killing your credit!