Hard money the easy way

Like non-QM lending, hard money lending is on the rise.

These days, hard money lending exists in a number of different forms, both with short-term loans as well as long-term rental property loans, known as debt service coverage loans, which are evaluated based on how the property performs. According to Mark Burch, business development manager at Temple View Capital, there’s a lot more competition in the hard money space than there used to be.

“Wall Street has really liked what they’re seeing in the returns and so Wall Street has started a lot of funds, and they have purchased companies, and they’ve opened up huge lines of credit to the different companies that are out there, which is driving the rates and points down. Investors are reaping the benefits because they’re able to do a lot of what’s out there for a lot cheaper than they had to do a couple of years ago,” Burch said.

While Temple View is competitive with rate and points, its real competitive edge lies in the advance and withdrawal component. Temple View touts itself as being “contractor-friendly,” meaning that contractors are able to access cash before they even buy the necessary materials. They have a team of people who work with contractors to create a draw schedule before the deal is even funded, which is particularly beneficial for the popular fix and flip loans.

“We find that they’re finishing the projects much quicker than they would’ve otherwise (so a normal rehab that would take 60-65 days is getting done in about 45 days), and then just allowing them to get it sold and turned quicker,” Burch said.

This keeps both investors and contractors happy, and a happy client goes a long way toward creating lasting partnerships.

“We’re all about the relationships, it’s not about the deal,” Burch said. “So we want to make sure that we build partnerships with our borrowers, we’re not just looking to make money on that one deal.”

There’s a lot of buzz currently surrounding the non-prime and hard money spaces because of their ability to provide loans to non-conventional borrowers. Adopting these products, however, can be a waste of time if you don’t have the appropriate support or clientele who would benefit.

“If you’re not in that space, if you don’t work with any investors, you’re not going to have anyone for these. These are not for your average person. In the raising interest rate market right now, these products don’t have a rate sheet every day where rates change. They’re pretty set. So they’re getting more competitive and cheaper . . . these programs are becoming more and more appealing to people because of just the payment and the ease of doing them.”

If you do have investors, however, and have shied away from hard money loans because they operate differently from the types of loans that you’re used to doing or you don’t want to veer far from What You Already Know, then you lose nothing by having a conversation with a lender. With a bit of initial training and guidance, the learning curve doesn’t have to be a steep one.

Even if you don’t have any investor clients, there are almost certainly some people in your database who have entertained the idea of becoming an investor. The appetite for investing isn’t going away anytime soon.

“With all of these HGTV shoes, rehab shows, flipping this, flipping that, you have this craze that’s out there right now with this market and everyone wanting to get involved in real estate,” Burch said. “[People] hear the safest way to earn retirement through cash flow, and it’s kind of fueling all these people wanting to get into this space.”

To that end, Temple View Capital offers a product known as a joint venture product, where new investors are teamed up with experienced investors on a project. New investors are guided through the process and are somewhat protected from mistakes they might make along the way, while the benefit for professional investors is that they have a more continuous deal flow.

“We’re very keen on the fact that if this person is brand new and successful on this flip, they’re going to want to do another deal and another deal,” Burch said.

Burch is a real estate investor himself. As a veteran of the program, not only can he recite the underwriting guidelines, but he can explain its inner workings from experience to both investors and originators alike.

Non-QM products suffer from the housing crash stigma surrounding sub-prime loans, and hard money lending often receives a similar reception. But, Burch said, the fact that investors now have a stake in the outcome is one reason why the hard money market is a strong one. The misconceptions are unfounded, and things are “different than this other catastrophic lender tendency we did back then.”

Burch said that a traditional hard money lender isn’t going to expose themselves to more than 70% of the after-repair value of a property, and because of where the average defaulted note is currently trading on the market, they can reclaim the property if the loan goes bad and still make money because of the equity spread. Investors are also now required to sign a non-owner affidavit, swearing to the fact they won’t be living in the property.

“Everybody was getting into these [owner-occupied] houses with no skin, no money, and no savings, and relying on the house to keep increasing in value,” Burch said. “Fast forward to now, the difference between those loans and these loans—and that’s why Wall Street loves it—they have a 30% equity piece in every one of the deals.”