So called “Hard Money Lenders” are what are also known as predatory lenders. What this means is they make loans based on the premise that the terms to the borrower must be such that they will gladly foreclose if needed. Conventional lenders (banks) do everything they can do to avoid taking back a home in foreclosure so they are the true complete opposite of Moneylenders Act Singapore.
In the classic days before 2000, hard money lenders basically loaned on the After Repaired Value (ARV) of any property and also the percentage they loaned was 60% to 65%. In some instances this percentage was as high as 75% in active (hot) markets. There wasn’t a lot of risk as the real estate market was booming and money was very easy to borrow from banks to finance end-buyers.
If the easy times slowed then stopped, the tough money lenders got caught in a vice of rapidly declining home values and investors who borrowed the amount of money but had no equity (money) of their very own within the deal.
These rehabbing investors simply walked away and left the difficult money lenders holding the properties that have been upside down in value and declining each day. Many hard money lenders lost everything they had in addition to their clients who loaned them the money they re-loaned.
Ever since then the lenders have drastically changed their lending standards. They no longer look at ARV but loan on the purchase value of the house which they need to approve. The investor-borrower should have an acceptable credit score and place some money within the deal – usually 5% to 20% depending on the property’s purchase price as well as the lender’s feeling on that day.
However, when all is considered and done, Moneylenders Act Singapore carry on and make their profits on these loans through the same areas:
The interest charged on these loans which is often between 12% to 20% based on competitive market conditions between local hard money lenders and what state regulations will permit.
Closing points are the main source of income on short-term loans and range between 2 to 10 points. A “point” is equivalent to one percent in the amount borrowed; i.e. if $100,000 is borrowed with two points, the charge for your points will be $2,000. Again, the amount of points charged depends on the amount of cash borrowed, the time it will be loaned out and also the risk to the lender (investor’s experience).
Hard money lenders also charge various fees for pretty much anything including property inspection, document preparation, legal review, and other items. These fees are pure profit and must be counted as points but are not because the combination of the points and interest charged the investor can exceed state usury laws.
These lenders still take a look at every deal just as if they will need to foreclose the loan out and consider the property back – they may be and also is going to be predatory lenders. I might guess that 5% to 10% of hard money loans are foreclosed out or taken back using a deed rather than foreclosure.
So aside from the stricter requirements of Moneylender Act Singapore, there have been no fundamental changes concerning how hard money lenders make their profits – points, interest, fees and taking properties back and reselling them.
These lenders also look at the investor’s capacity to repay the loan each month or to create the required interest only payments. If you visit borrow hard money, expect to need some of your personal money and have lmupww in reserve so that you can carry the financing until the property comes.