5 Ways to Get Out of a Hard Money Loan
From this video guide, you will learn 5 ways to get out of a hard money loan suggested by Mohit Anchia, a professional hard money lender.
Mohit describes solutions for fix and flip investors as well as for landlords.
To learn about them, watch the video or read its transcription below.
How to Get Out of a Hard Money Loan: Video Guide
Hi, today I am going to cover five ways to get out of hard money loans. This video is exclusively recorded for Real Estate Bees, and I am Mohit Anchlia from Quick Easy Lending.
We provide hard money loans, we lend nationwide. So, let’s dive right into it and talk about this topic in detail.
You always need to have an exit strategy with hard money, because those are short term loans for which hard money lenders charge higher interest rates.
The term is typically 12 or 18 months — the time it’s going to take for you to do the repair and be able to either sell the property or rent it.
With that, obviously, you need to have a good exit strategy in place.
#1 Refinancing Your Hard Money Loan
So, what are those top five ways of getting out of hard money loans? The number one is to refinance the loan. What does it mean “to refinance the loan”?
This means that you look at a more conventional traditional lender who specializes in residential or commercial real estate.
They can convert your hard money loan into a traditional property loan with a lower interest rate and a longer term.
The second option is taking an SBA loan (a small-business loan partially guaranteed by the U.S. Small Business Administration) to refinance the property.
So, those are the top two ways you go about refinancing properties to get out of a hard money loan.
This way, you won’t have this problem of reaching the end of your short-term loan with a balloon payment due at the end. So, that’s the first way of doing it.
#2 Selling Your Deal As Is (Quit Claim to Another Investor)
If you are not able to find a traditional lender who is going to fund your deal, or something else has changed in your situation, then the second way is selling your property or your deal as is.
You assess your deal and you go and find real estate investors in your area. A lot of investors are looking for properties. But you would ask “why would investors want to buy another investor’s deal?” And that’s a fair question.
Some investors don’t really want to invest in properties and do the repairs. They want to reap the profit as quickly as possible.
You may have something that’s already a deal, that’s already interesting. Let’s say the property you bought at $50,000 is now maybe at $60,000 so they see its value.
They will think: “I am getting this property at $50,000, the work has been done, and I can basically just buy the property, get equity in it, and it’s a good deal for me.”
You can find real estate investors through different ways. If you have been in this business for a long time, and if you have relationships out there, you can reach out to them or come to one of the lenders.
For example, we also help with finding investors, and there are other lenders as well who could help. You just need to make a connection.
#3 Asking Your Lender for Deed in Lieu
The third way is asking your lender about a deed in lieu of foreclosure. What does that mean?
If you have a lender and you have tried step one, step two… Preferably step one, because at the end of the day, you know you are working hard for your deal.
With the first method, you will be able to generate a cash flow. If not, then try step two.
Now, the next step that you could take, if nothing else works, is that you would go to your lender and ask them to keep the property and forfeit all the payments you have made so far.
This means that you ask the lender not to foreclose on the property.
Why would you want to do that? The reason is that you just do not want to foreclose on the property because that is going to impact your credit score.
It will drop your credit score really big time. It could be a 100 to 200 points straight drop and that goes on your record.
This makes it difficult for you to continue this business because hard money lenders are not going to want to lend to you if they see that record in the credit report.
You want to stay away from that so you try to make a deal with the lender. But why would a lender be interested in that?
Because they know your position, they know the market, and they may see that the market is really good and the deal is really good. They will be able to get the property in the market and sell it.
They may be really interested in that. But if your property has depreciated, it is not in good condition, and it is not a good deal, they may not do this.
But that’s one of the options that you could definitely try.
#4 Asking for Help from Your Family and Friends
The next one is asking for help from your family and friends. And you could debate if you want to try this one or the previous one first.
So, essentially the way this works is that you create some sort of a business plan. You put the numbers together to show the potential of what you’re doing.
Because you want to go to your family and friends not when it’s a losing activity. You also have to consider that you are asking for a favor.
You want to make sure that you’re presenting them a good deal with a good conscience, and you want to make sure that you are providing all the information necessary.
So, what you do is you create a business plan: you write all the steps, you approach your family members and friends and then ask for all the funding that you need.
Show them how good it’s going to be in the future: “The property price is this much right now, I’m going to do the repairs, and at the end I will be able to sell this property for this much. And when that happens, that would be the pay off. My intention is to pay you off by this time…”
You could also additionally provide some benefit associated with that because they are lending their money.
#5 Defaulting on the Hard Money Loan
Let’s say you don’t have any of the aforementioned options, so now you have to default on the property, and you go ahead and default.
How does this happen? The process is that it’s going to go into foreclosure.
The first thing is that the lender always has what’s called the Default Interest Rate. When you default, the interest rate for the short-term jumps, maybe doubles.
If it’s a 14% it might become 28 – 29 %, whatever that is there in the deed, and that’s for the short term.
That is done so that the lender can create that pressure on you to come clean on this funding, and if you don’t do that, then they’re going to foreclose.
With foreclosure, it just depends on how long it takes. It depends on the jurisdiction, what state you are in, what courts are saying…
Now, that is the last option. I hope nobody runs into that. The downside of it is that it shows that the money was borrowed irresponsibly. It goes on your credit report and lenders are wary of it.
Going forward, if you want to be in this business, it becomes really difficult to qualify for a hard money loan, as well as a traditional loan, next time.
If you do get the loan, it’s going to be a small LTV, and you will have to come up with a higher down payment to show that you have the skin in the game.
How to Avoid This Situation Next Time
So, essentially, those are the five ways. You always want to learn and say “Okay, it has happened this time, but I do not want this to happen next time.” Apply those lessons from day one.
When starting your own house flipping business, have a really good plan, have really good support, and make sure that you’re ahead of the game.
A lot of the time this happens because it is just human nature that we assume that things are just going to work out.
But when you are taking out a hard money loan, do not assume things will just work out. Stay on top of the game.
Stick to the budget. Stick to your plan. Do thorough analysis and then always, always have an exit plan going into it. Don’t be caught by surprise.
So, that’s it for today. I hope this video was helpful. Thank you.
About the author:
Mohit at Quick Easy Lending works with businesses to meet their financial goals. At his company, Mohit offers a broad array of business lending options. Mohit himself runs various businesses like food retail, software consulting, and financing. Mohit has broad experience in various fields and understands how hard it is for any business to go out and get the finance they need to meet their business goals.