If you're dealing with a top tier hard money lender (i.e., Zeus Mortgage) then you should stay away from deals that they won't approve. Typically, these hard money lenders are in the business of lending money and not owning real estate, so they evaluate each deal on the premise that YOU MUST SUCCEED. If not, they will then own the property and that's not what they do. There are some hard money lenders who are your lender AND your competitor. They are lenders and they buy property. Obviously, there is an inherent conflict of interest here.
One of our most recent customers (an investor) was telling us how he called a local lender who was also an investor. According to him, they told him they couldn't finance the deal and that the deal didn't look good. Soon after, the investors deal source (his wholesaler) called him to say that the lender actually called to inquire about buying the property directly from the wholesaler. WOW!!! Of course, every lender who is also your competitor will not be chasing your deals, but it happens more often than most would admit.
Hard money loans will get you into a property with no money out of pocket, but the hidden pitfall is that you do need some way of paying for your repairs upfront. Traditionally, hard money loans require you to make, and pay for, repairs and then get reimbursed. So, you either need the cash/credit cards to make the repairs or a contractor who will work on a draw system. There are a few programs out there that will role EVERYTHING into the loan and you never "come out of pocket" for anything. I know what you're thinking.. and yes, you have to use their contractor who is dramatically inflating the bids on all the jobs to skim money from you and the lender. So, they sell this program as... you find the property, we'll lend you everything to fix it, to sell it, the carrying costs, and you keep all the profits. In most cases, by the time they are done inflating everything you have split the profits with them. Historically, the lenders who have offered this type of loan have either been sued, are being sued, or have gone bankrupt which always leaves the investor out in the cold.
The standard for hard money is 70% LTV of the ARV (after repaired value). There are several programs now that go up to 90% of the ARV. My thought is this... it takes a special kind of investor to buy a property that needs a large rehab and when you're done you only end up with 10% equity. Basically, they spend weeks or months working a rehab to get 10% equity which is about the same discount they could get if they shopped retail with NO REHAB REQUIRED. Incidentally, its always the "buy and hold" investor who likes these type of deals. I'm personally a "buy and hold" investor so I can relate. However, one of the oldest tricks many of these folks are forgetting is the bonus rent and deposit you get on a property that doesn't need a rehab. If you buy a property that is ready for move-in and it has equity then you can rent it before you even close on it. You can add a Special Provision that "The Buyer has the right to show and market the property for sale or rent prior to closing.". You can also add that "The Seller agrees to allow the Buyer to lease and sublease the property prior to closing." There are several versions to these provisions. Consult your attorney prior to adding them. So, your closing is set March 30 and you find a renter on March 1st. Your first payment won't be due until May 1st (depending on the loan). Assume the tenant pays you $1k in rent for March plus your $1.5k deposit. That is $2.5k. You get rent for April and May which is another $2k, and your first payment considered late by the 15th of May (give or take). That is $4,500 before your buddy is even done with his rehab.
Back to the point at hand. Several people will tell you stories of how a seller paid them to take over their house. Its happens. There are lots of options. Go to some Focus Groups, some Workshops, don't miss the General Meeting, listen to the Real Estate Uncensored Radio Show Saturdays 11AM to Noon on Biz Radio 1320AM (you can listen online at http://www.reuradio.com) , and network to find out what you like and what you're gifted at.
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