Hi all,
I recently joined DFW REI Club and attended last Saturday's meeting on the topic of Subject-To financing.
Prior to joining the club, I bought a cash house ($13K including closing costs) and financed the rehab with consumer credit ($12K including a complete 2 ton HVAC system in the rehab). I am holding the house and it is currently leased ($550/month). I was able to buy from a wholesaler and complete the rehab just working on the weekends. I did all the work except the HVAC, attic insulation , a run of fence and paint. Time from purchase to having tenants in place was about 2.5 months.
I am learning now that it might have been strategtically better to use a HML rather than a Visa and a personal LOC. That being said, I am a little weary about HMLs (mostly ignorance based) and wanted to pose some questions so I can better determine the risk/benefits of using Hard Money.
Not that I would plan to, but I was hoping some of the HMLs or folks with experience borrowing form HMLs could describe what happens if you default (the biggest risk I can identify with using HML or any other type of debt).
So far, this is my understanding of the use, benefits and risk of using hard money:
1) + access to cash you don't have or do have and don't want to tie up.
2) + Short term financing that can be used same as cash for discounted purchases and expediting closings and ability to purchase properties otherwise not financeable with a mortgage due to property condition.
3) + Short term financing for rehab costs.
4) + Debt that does not count against your debt to income ratio when looking to refinance the property after rehab is complete.
5) + Refinancing terms of HML is typically easier than doing a cash-out refi.
6) – Terms/up front fees of Hard Money demands higher margins on a deal.
7) - Most hard money is for 6-12 months, but mortgage lenders may require up to 12 months seasoning which would create a default on the HML or a fee generated to extend the HML if mortgage lender required 12 months seasoning. (unless you could refi exactly the same day that HML expired ).
8) - One cannot be certain that long term financing will be available for long term hold investors even once seasoning has been satisfied.
9) - Less experienced rehabbers may not have enough experience to flip a house in time or within budget to not default on the loan.
10) - HMLs will require a licensed contractor to do the work so DIYers can't save by doing the work themselves.
So this is my general understanding of Hard Money and how it can work for and against an investor. I may not be right on some or many points - please correct me where I misunderstand.
Ultimately, what happens if you default on the HML and/or can't afford to pay and extension? I assume that the HML takes the property and you loose any cash you have invested in the deal. What other negative repercussions usually happens and/or could happen?
