Real estate might be one of the most reliable investment ventures, but it requires a lot of knowledge to stay updated on the latest trends. For example, understanding why smart homes are so popular can inform you on what upgrades to add to your next rental remodeling project. Also, having a clear grasp of how real estate financing works can help you secure approval on your next investment and make better financial decisions. This article explores one of those tough financing questions and offers practical steps to overcome them.
Do you wonder how different financing methods after your property’s value? How do hard money loans affect the selling price of a property? We’ve got all the answers to that and more below:
How Do Hard Money Loans Affect the Selling Price of a Property
1. Interest Rates
One of the significant benefits of using a hard money loan to finance your investment is that they’re highly flexible and have a fast approval rate. Unfortunately, lenders often demand higher rates of up to 18% in exchange for their convenience. This increased markup means the borrower should expect higher mortgage payments, and meeting up with such expectations can be burdensome. As a result, investors trying to recoup their money with profit will try to pass the burden to the buyer in the form of a higher property price.
2. Short Repayment Terms
Repaying a hard money loan is often a race against time, as these mortgages tend to be short-term arrangements. To meet the terms of their contract, some investors might be willing to drop the prices of their newly acquired property to encourage more buyers to buy it.
3. Loan-to-value Ratio
Loan-to-value (LTV) ratio is one of the most common metrics for evaluating a property’s value and determining the loan amount. Since many investors use hard money loans for real estate projects like a fix-and-flip, it would mean borrowing money at a smaller amount than the property’s value post-renovation. Thus, that would mean a decrease in equity. On the other hand, lenders that use After-repair value (ARV) to determine the loan amount allow room for higher equity which is more appealing to buyers. Look for a private money lender in Baltimore and discuss how to qualify for a hard loan.
Finally, reputation is another loan factor affecting a property’s selling price. Compared to traditional mortgages, hard money loans are often high-risk, which can give the perception of reduced value to buyers and lower the overall selling price.
Steps in Applying for a Hard Money Loan
1. Get Educated
One of the first steps to applying for any loan should be to get educated. It’s crucial to perform your due diligence and thoroughly understand the pros and cons of going for a hard money loan. It would also help if you knew the criteria to qualify for a hard money loan. This would give you an idea of whether you need to boost your credit score, find sufficient equity, or devise a better exit strategy to get approval.
2. Find a Reliable Lender
Armed with the proper education, you can move to the next step of trying to find a reliable lender. Avoid running to the first ad you see; take time to scrutinize each candidate to steer clear of scams. Watch out for fraudulent lenders with insecure websites adamant about upfront payment. Feel free to ask experienced colleagues and real estate professionals for their recommendations.
3. Compare Rates and Terms
After narrowing your search to the top lenders in your area, you should compare their terms. Many investors make the mistake of going for the lender offering the lowest interest rates, but that’s not a holistic approach. Late or early payment fees and closing charges could affect your overall repayment. Considering factors like loan repayment schedule, time frame, and additional costs will give you a better idea of which lender is the best.
4. Present Your Case
When you’ve settled on an appropriate lender, you may present your case to them. This step is where you try to sell the potential value of the property you have in mind. Here you should include details about the location, neighborhood, and state of the property. If you have a history as a real estate developer or concrete plans to repay your loan, you can also include them in your case to make it stronger.
Hard money loans are a popular financing solution for many investors, but they can also affect your selling price in a mostly negative light. Reputation, LTV ratio, and short repayment terms can cause investors to mark down their property prices. However, the extent of its impact on your returns depends on the unique circumstances of each property.
Irrespective of your circumstances, it would be best to apply for a hard money loan with ample preparation. Getting educated, finding a reliable lender, and comparing rates across the board can help you negotiate better contract terms.