"Hard money" floats flips

"Hard money" floats flips

Despite high interest rates, short-term real estate investors lean on loans

By Tom LaRocque
Special to The Denver Post
Posted: 06/13/2010 01:00:00 AM MDT

Nathan Adams is pictured last week inside a north Denver fix-up he bought for $200,000. Adams uses hard- money financing, factoring in the finance costs "from the start." Investors say the capital fills a void where conventional banks are too cautious, too slow and generally not interested. (Karl Gehring, The Denver Post )

Eight to 10 times a month, an experienced real estate investor calls or walks into the Wheat Ridge office of Pine Financial hoping to borrow money and walks away with a check.

At least as often, inquiries come from newbie or wannabe investors pondering the purchase of a fix-up property. When they ask about rates, lender Kevin Amolsch recites the terms.

"We charge 15 percent annually plus four points up front," he said. A "point," some callers need to be told, is essentially a 1 percent fee. So on a $100,000 loan, they'll owe $104,000 before the rate clock even starts ticking.

"Some people are shocked," Amolsch said. With rates so much higher than any consumer bank, some may wonder if the terms are even legal.

"Hard money" lending is not only legal, it is thriving in the world of short-term real estate investment.

The term generally refers to high-interest loans due for repayment in a matter of months, not years. Pine Financial's standard promissory instrument is a nine-month note with interest-only payments due every month and a balloon payment at the end of the term.

The "cost of doing business"

A handful of local firms solicits new hard-money borrowers. Many individuals — mostly investors themselves — lend their personal funds. And some national firms do business here as well.

Hard money is the critical element that makes many deals possible, investors say. The capital fills a void where conventional banks are too cautious, too slow and generally not interested.

Nathan Adams bought a fix-and-flip home on Quivas Street last year. He paid $81,000 for the property and incurred about $5,450 in purchase costs, including four points on a loan from Pine Financial. He borrowed $108,000 and put $7,000 of his own money into the deal.

After $28,000 in repairs, Adams sold the property for $151,000. Holding costs and selling costs, including broker commissions, came to just over $10,000. In the end, his $7,000 cash investment yielded a 326 percent return of $22,867, even with about $8,000 in finance costs.

Hard-money financing is "just another cost of doing business," Adams said. "The key is to purchase it right and factor in your finance costs from the start."

Hard money is often called "equity based" or "collateral based" lending. Qualifying for a loan "depends almost entirely on the value of the property," said Paul Pedri, a partner in Investors Choice Funding, another local firm.

Pedri lends up to 70 percent of the expected value of the property after repairs. His firm is "far less concerned" than conventional lenders about the borrower's credit score, he said. "But we do still check for past bankruptcies and foreclosures."

Denver investor John Klahn has acquired five long-term rental properties using hard money. In each case, he subsequently refinanced with a conventional loan. He has used about 10 short-term fix-and-flip projects with hard money.

"I do it because it's quick and convenient, and I can usually close a purchase within two weeks," he said. "The interest rates don't matter to me because the loans are very short term."

Shrewd investors

Hard-money lenders are often savvy investors themselves. Amolsch, 31, has a military background and a finance degree. In college, he worked in a bank loan department and started investing in real estate. He now owns about 20 properties in Colorado and Tennessee, he said.

Successful investors tend to follow a "career path," according to Amolsch. They may start out by "wholesaling" homes, buying low and selling to other investors for modest profits. Then they learn to fix and flip properties.

From there, investors either become landlords, living off their own rental properties without so much hard work, or they go into some form of commercial real estate. Finally, he said, many smart investors become lenders themselves.