Posted by al on December 30, 2005 at 15:39:47:
that makes sense. thanks!
HML - what does 15% and 6 points mean? - Posted by al
Posted by al on December 30, 2005 at 13:21:57:
quick question.
some hard money lenders say 6 points and 15%.
lets say i have a property under contract for $100k and the ARV is $140k
so if i were to ues a HML, i would have to pay $6,000 for the 6 points of $100k
and 15% interest of $100k per month of $1250
property will be a rehab and will take 6 months to sell.
am i literally paying $1250 out of my pocket each month or is that $1250 already included into the hard money loan?
thanks
al
Re: HML - what does 15% and 6 points mean? - Posted by Lyal
Posted by Lyal on December 30, 2005 at 17:01:05:
Al,
One point that I didn’t see the others touch on is that this is NOT a deal. Way too skinny for a rehab deal especially if you’re a novice (just assuming from the sound of things). The HML costs, rehab costs, holding costs and cost of resale will eat up all your margin and more. Remember, it always takes longer than you think and always costs more to rehab.
I’d keep looking.
Lyal
Re: HML - what does 15% and 6 points mean? - Posted by John Corey
Posted by John Corey on December 30, 2005 at 14:45:47:
Al,
- It depends on the lender how the details are worked out.
Some lenders will roll in the payments or other costs. That has the effect of lowering your capital to buy the property as you still need to be under the LTV limit.
If you are rolling the payments in then you are likely paying points on the future interest payments. It can depend on how the details are calculated.
-
Some lenders will not work from ARV. They work from as-is.
-
The LTV, the interest rate, the points, the pre-payment (if any) all vary by lender and sometimes by program from the lender.
Sticking to your example as you laid it out, I would expect the $1,250 to be paid by you monthly out of pocket and therefore not already rolled in. The payments could be rolled in as I noted but you are paying extra fees for having the pre-paid interest in the loan.
John Corey
Re: HML - what does 15% and 6 points mean? - Posted by george
Posted by george on December 30, 2005 at 13:59:57:
Most hard lenders will roll everything into the back end where you don’t have monthly payments while the rehab is ongoing. Bear in mind that each HML sets his own rules, so there may be differences.
Also understand that the 6 points is fixed, regardless of when the loan is repaid. If it’s six months, then your effective interest rate would be 27%. (2x6+15)
george
Re: HML - what does 15% and 6 points mean? - Posted by al
Posted by al on December 30, 2005 at 17:22:55:
thanks Lyal,
i understand what youre saying. it was just a case scenario to understand the meaning of the percentage and points.
Re: HML - what does 15% and 6 points mean? - Posted by al
Posted by al on December 30, 2005 at 15:02:43:
when we deal with HML do we have to worry about DOS (due on sale)? i would say, no?
Re: HML - what does 15% and 6 points mean? - Posted by John Corey
Posted by John Corey on January 03, 2006 at 18:16:54:
While George presents a crude (fast) way to approximate the APR I think it is a lot better to know how to do the math. A quick review of George’s formula leaves why one doubles the effect of the points while not reducing the interest rate as the 15% is an annual number. Do we pay 15% or do we pay 7.5% as you only pay half the year.
If you get out a financial calculator then you will find…
The APR is 28.00% for the original calculation if we assume interest-only monthly payments. If there were no payments for 6 months (the interest is held back at the start of the loan then the APR is 28.61%.
If the loan was for 12 months the two APR figures would be 21.73% (assumes interest only monthly payments like above) and 22.33% (payments rolled in so cash received at close is reduced).
Why does it matter?
Even if the rate you pay for 6 months is 28+ compared to 22+ you would still pay less in interest if you pay it off in 6 months. Paying interest on the loan for 6 months more is certainly going to eat into the profit more even though the APR is lower for the longer loan.
People try to use simple calculations and end up with bad results and they do not know it has even happened.
Specific example. Many folks think hard money is too expensive but want to split the profits with a partner (50/50 JV deal). In most deals that are worth doing an equity split is going to be way more expensive than what a hard money lender collects. Plus the partner wants a say in the decisions, they want to be on title to protect their position. A partner brings with them possible liability exposure (divorce, accidents, unrelated business issue). A HML just wants the checks sent on time and otherwise does not care what color you painted the walls.
Once a person figures out how to do the math they can restructure their deals so that they get a better deal on the front end. Sellers can not do the math so I find that you can offer the seller a deal that appeals to them but actually saves the investor more money.
Just think what the deal would look like if rather than a hard money loan or any new financing the seller would lease/option the place for 3-6 months so you can get in there and put your money into the repairs. They might even let you add the monthly payments to the back end and not charge interest on those payments.
Finance is the key to RE deals and the key to financing is being able to run the numbers.
If you want to have some fun go over to the MH forum and notice how some of the deals have the investor collecting the interest and they are earning annual returns that hit 140.00% in some examples. Get Lonnie’s book (the 1st or 2nd) for more examples.
John Corey
Re: HML - what does 15% and 6 points mean? - Posted by al
Posted by al on December 30, 2005 at 14:22:30:
“If it’s six months, then your effective interest rate would be 27%. (2x6+15)”
i dont understand how its 27%?
where did you get “2” from? and can you give me a scenario? i thought 6 points is just up front fees and 15% would be the monthly interest.
Re: HML - what does 15% and 6 points mean? - Posted by John Corey
Posted by John Corey on December 30, 2005 at 18:17:51:
Al,
DOS is a contract issue and for that you need to check the contract you are signing.
Many hard money lenders are not actually strictly hard money. They ask for credit details, want to see cash reserves, want to know you have cash in the deal and want to know you have a track record with such projects. If they are checking all of the above concerning the borrower they might actually care that there was no transfer of the property securing the property.
So, 1. read the contact. 2. Most lenders are much less concerned if the payments are being made on time.
BTW - As most HM loans are due in 12 months (plus or minus) it would not make sense to chase someone for DOS as the loan will be due in a few months anyway. If the borrower does not pay at the end of the term of misses a payment that is another issue.
John Corey
PS. As a HML is normally a smaller operation and they are creating their own loans you can negotiate on the DOS issue. Not that you will get a yes. Just that it could be something you can have changed. In reality there will not me much value in getting the DOS removed. Make your money and move on while paying off the HML. Then they will come to love you and will be there when you need funding.
Re: HML - what does 15% and 6 points mean? - Posted by Bigfoot
Posted by Bigfoot on December 30, 2005 at 15:35:30:
The points are fixed so since you only use them for half a year, that would effectively double your interest rate of the points. (Hence the 2) If you had it out for a year the effective rate would be 21%.