Why should you consider hard money for construction loan?
Banks are not very eager to approve construction loans even when someone has good credit. With bad credit and without the ability to show sufficient income on tax returns there is very little chance to get a conventional construction loan. If you have an opportunity to add value to vacant land buy building it up and sell it at a profit you are a good candidate to get a construction loan. If you can simply add to existing structured additional leaving space or improve it's punctuality by adding a bathroom or improving a kitchen you are an excellent candidate for hard money construction loan.
Selling price of completed project should be higher than the cost of construction + the cost of the land acquisitions + the cost of the loan.
From a lender point of view to get a loan approved use the formula:
FV > (PV+ CC + LC) x EF
Future Value > (Present Value+ Construction Cost + Loan Cost) x Equity Factor
FV-Future Value is the fair value price of the property after the construction is completed. Hard money lender will always use very conservative approach to the fair value price and if in doubt will use the lowest possible valuation.
PV-Present Value is fair the value price of the property as it exist in present time . Hard money lender will always use very conservative approach to the fair value price and if in doubt will use the lowest possible valuation.
CC- Construction Cost will be embellished by estimates from a licensed contractors. It is best to have several bids and background check on the contractors. In cases were the borrower is also the person who is doing the construction the lender would need to look carefully into the estimates.
LC- Loan Costs including loan origination commission and fees to the broker and caring cost of the interest for the duration of the construction.
EF- Equity factor or risk factor associated with the loan. The EF factor is a number that can be anywhere between 1.5 to 4 or more depending on the the following factors:
Simple construction hard money can be approved fast especially when the investor take a big Equity Factor . Complex construction projects require more due diligence but with very high Equity Factor (very low LTV of projected future value) can still be done fast .
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