High-End Hard Money Loans
Hard money loans are being used for investors of high-end fixer-uppers.
Hard money loans differs from a mortgage in that the loan amount is based on the anticipated sales price of the home after improvement costs. Terms are short and the loan is backed only by the hard asset, the property. Borrowers of these loans avoid a stringent assessment of their credit scores, income and debt-to-income ratios.
During the mortgage crisis, hard money loans were most known for their association with low-end home-flippers profiting off cheap foreclosures, cosmetic improvements and fast turnarounds, as well as some small lenders who targeted borrowers rejected by conventional lenders. Now hard money lending firms and funds are increasingly financing higher-end investors who are eyeing the recovering luxury home market.
More important, high-end flippers are averaging a 41% return on investment (ROI) for homes priced $750,000 to $1 million, and a 35% ROI for homes priced in the $1 to $2 million range. In comparison, flipping a home priced between $200,000 to $300,000 generated a 22% return, the data shows. Of buyers who resold homes at prices ranging from $750,000 to $5 million, 51% made their initial purchase with cash, suggesting that nearly half are using some kind of financing, Mr. Blomquist says. However, less than 2% of overall home loans are backed with hard money, according to Inside Mortgage Finance.
Other hard money lenders also are seeing a boom for bigger loans. In early September, for example, one hard money lender we work with closed on a $1 million loan for a townhouse rehab project in Harlem, Connecticut and eastern Pennsylvania
Here are a few more considerations investors, and even high-end home buyers, may want to keep in mind about hard money loans:
Hard Money Loans Require Different documentation.
Borrowers need to provide architectural plans, detailed construction budgets, contractor bid sheets and an appraisal to support the anticipated post-renovation sales price.
Renovate, then refinance. Home flippers are the main market.