This week I didn’t have that many responses to my survey, however there was one question that really stuck out to me that I felt needed further elaboration here on my blog:
“Is a down payment always required by hard money lenders?”
The really short answer to that question is a resounding “NO”. But I think we need to dive in deeper here on a few different levels…
First we need to make the distinction between a down payment and needing to come into a deal with money due to a gap from values because there’s a huge difference.
Some lenders will require a certain percentage as a down payment into the deal. And usually they will base the percentage you have to put down on your credit score.
Here at DoHardMoney.com we have a hybrid model where we do direct loans with our own private money in 11 states and in 27 additional states, we have relationships with different direct lending partners so we can help our clients get deals done.
One of our biggest partners requires a down payment to get funding. They will ask for 20% if you have good credit and 30% if you have bad credit.
Why do they do this?
All hard money lenders use different underwriting criteria in order to assess risk. You have to remember that when you are taking out a loan, someone is risking their money on you!
People are only willing to do that if the circumstances show there’s a high probability that there will be a return on the money that they are risking on you. Otherwise, what would be the point in lending? People do it to make a profit, not for charity…
The HML’s that ask for a down payment are doing so to lower their risk in the deal. Plus, by having the borrower put some skin in the game, it usually results in a win/win for everyone. The borrower puts in the effort to be successful and makes money when he resells the property. The lender makes money on the loan and the interest.
In our direct lending model, we don’t ask for down payments. However, many people will be put into a situation where they have a money gap due to their after repair values being out of line with ours.
They usually will misinterpret this gap as us asking for a down payment, but that’s not really the case. I may seem just like a case of semantics, but let me give you an example.
Let’s say you want to buy Property A to rehab and resell. You determine after looking at comps that this property will be worth $200,000 after you do $25,000 in repairs.
Based on the market, you make an offer on this property for $130,000. You need to borrow the full purchase price you offered plus the $25,000 for repairs from a hard money lender.
At DHM, you’d submit to us a loan application and we’d order evaluations of this property. We would have 3 independent evaluators go out to the property and submit reports back to our underwriter with 18 comps and their opinion of the market.
Our underwriter talks to these evaluators and determines what we feel is the correct ARV of a property like this in that neighborhood. The after repair value we determined for this property came back at $190,000 – only 10% off what you calculated.
We lend 70% of the ARV we calculate for both purchase and repair. $190,000 X 70% = $133,000 that we can lend you. $25,000 of that would be set aside for repairs, leaving you $133,000 – $25,000 = $108,000 for purchasing the property.
If you wanted to close this deal with us, you’d have to figure out a way to bridge that gap between the $130,000 you offered on your purchase contract and the $108,000 we can lend to you.
If you would have calculated the ARV differently and made your offer accordingly, we could have given you the full purchase price and rehab money, so as you can see this is totally different than requiring a down payment on a loan no matter the circumstances.
We also understand that this situation arises and have created avenues for our borrowers to be able to cover this gap without having to use their own money. It’s through getting a 2nd position lien on the property with one of our gap financing partners who fund these scenarios.
Adding another layer to this conversation, we can touch on how some hard money lenders lend based on the after repair value like we do and others will lend on the purchase price.
Those that lend on purchase price will only give a percentage of what you plan on buying the property for – usually a max of 80%, which means that with any of these kinds of HML’s you will be making a down payment.
I think the core reason behind your question is that you are trying to get into real estate investing with little or no money of your own.
It certainly can be done, however you need to understand all the circumstances that need to align in order to make that happen and what tools you will need at your disposal to make it work too.
That’s why I created the video that you can watch on the next page. It will walk you through everything you need to know about 100% financing for fix and flip investments. You’ll also get access to the little know tools and resources you need to accomplish no money down real estate investing.
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