Title: Unpacking Hard-Money Loans: A Guide for Attorneys

Slide 1: Topics Covere:

 Features of Hard-Money Loans

 Disadvantages of Hard-Money Loans
 Use Cases For House Flipper / Landlord
 Purchase of Sale Contract - Key Clauses
 Financing Documents
 Hard-Money Settlement Statements vs. Standard Residential

First Slide Set: Features of a Hard-Money Loan

 Asset-Based Loan
o Asset-based financing where collateral is real estate.
o Loan amount is not primarily determined by the current value of the property, but
by rehabilitation costs and after-repair value ("ARV" is future value of a property
repairs and renovations have been completed).
 Types of Real Estate / Transactions:
o Residential house flipping, wherein a property is bought, renovated, and sold for
profit in a short span of time to a home buyer.
o Buying a rental property with the intention to refinancing with more traditional
lenders later.
o Time-sensitive deals that don't qualify for traditional mortgage financing
 Short Loan Term:
o Ranges from a few months to a few years.
o Timing suited for real estate investors seeking to: (1) flip for after repairs for
profit; (2) conduct repairs of rental property and then re-finance to pay-off the
loan utilizing a somewhat more traditional long-term investment loan.
 Higher Interest Rates:
o Higher interest rates compared to traditional loans ranging from the mid to the
double digit interest rates (5-12%). I
o Increased rate is due to the high the lenders assume, considering these loans are
asset-based with the property serving as collateral, and typically not based on
creditworthiness of the borrower. S
o Swift underwriting process with less due diligence add to the increased interest
rates.
o Issued by private loans not subject to guidelines for homebuyer mortgages.
 Fast Approval and Funding:
o Faster approval process since less based on personal creditworthiness (2 weeks
rather than a 2-months)
o Speed attractive to: (i) sellers of distressed properties that need fast closing, i.e.
violations, foreclosures, troublesome tenants; (ii) investors wishing to act fast to
not lose their deal or worse market conditions
o Funding normally fast since asset-based
 Private Lenders:
 o Private lenders or investment firms issue investment loans rather than traditional
banking routes.
o Since they are private entities they can focus their processes on the fast
approvals/loan terms streamlining the approval process
o Len
o Flexible Terms:
 Flexible Terms:
o Given private lenders and sophisitcated buyers, less bound by stringent guidelines
and individual terms.
o Customization: Repayment schedules (shorter/longer), interest rates (higher/ower)
o Loan-to-value ratio: Often in values that exceed purchase price if includes rehab
costs (though it depends on the lender choice, buyer quality, asset value)
o Terms often are interest only, with balloon payment at end of term to pay-off
prinicpal loan balance

Second Slide Set (Should Be 1 Slide) - "Disadvantages Hard-Money Loans"

 Default Risk: Inherent risk of default due to their structure, due to higher interest rates,
strict repayment terms, and short loan term. duration.
 Expensive: High interest rates, loan points (1% of loan amount), and often interest only
payments
 Foreclosure: In the case of non-payment or inability to adhere to the agreed repayment
schedule, the lender has the legal right to seize the property, which is used as collateral
for the loan. This harsh consequence could result in substantial financial losses and
potential legal challenges.
 Limited Regulations: Fewer regulations allow for potentially enabling predatory lending
practices (taking over an LLC, personal guarantees)

Third Slide Set (Should Be 1 Slide): "Use Case - House Flipper"

 Deal Analysis For Investor:

o Identifies a property for sale ($100,000)
o Determines after-repair value ($200,000)
o Determines scope of work and cost $50,000)
o Run math for offer amount that suitsinvestment criteria (for example, if sale price
is acceptable: $100,000)
 Loan Application: Investor than contacts lenders to figure out loan terms such as
interest, loan costs, and loan amount (for example:Lender provides a loan 60% Loan-to-
ARV (for example: $120,000).
 Renovations and Repayment:
o Acquires property for $100,000 and spends $50,000 on renovations.
o Sells for $200,000.00, pays back the $120,000.00
 Return on Investment: Profit is $30,000.00 ($200k sale price, minus $120k loan, minus
$50k rehab costs) reduced by closing costs, holding costs, and interest payments

Fourt Slide (Should Be 1 Slide): "Use Case - Landlord Buy and Refinance"
  Acquisition and Renovation: Landlord buys a rental property for $100,000.00,000
needing $50,000 in renovations with an ARV of $200,000.00. Lender agrees to a 60%
Loan-to-ARV ratio and provides a hard-money loan of $120,000
 Repairs and Refinancing: Landlord acquires and renovates. Once renovations are
complete and the property has tenants and/or increased rent, the landlord seeks to
refinance with a much higher appraisal value that is enhanced value due to better
condition of the property and hopefully higher rents to due new leases and improvements
 Hard-Money Loan Payoff: Takes out traditional loan for 70% of ARV ($140,000k),
pays off the hard-money loan of $120,000, if its a good deal has a small profit ($20k
minus holding costs, closing costs, interest payments)
 Cash Flow: Landlord now holds a more traditional, long-term, lower-interest mortgage.
Hopefully the rental income covers the new mortgage payments and property holding
costs, yielding good ROI for landlord.

Fifth Slide Set: "Purchase of Sale Contract - Key Clauses"

 Goals: Avoid breach of contract and get deposit back

 Due Diligence/Inspection: Client needs time for:
o Fine-tune market analaysis of ARV;
o Determine scope of work and costs, particulary if specialists/contractors needed
o Determine loan terms and length to buy/resell or buy/refinance
o Assess profitable
o Cancellation Right: Remove provisions allowing seller to repair items as might
be seen in attorney review riders/standard realtor contract. Not consistent with
idea that investor is conducting scope of work.
o Mortgage Contingency: May or may not be baked into due diligence if period is
long enough
 Mortgage Contingency:
o Denial: Allows for the cancellation of the deal if the real estate investor is denied
the loan. A deal might be denied due to low appraisal of ARV, too high costs for
scope of work, assets of the borrower (for example, loan can only be 60% of ARV
but buyer cannot make up the rests of costs to finish the deal).
o Unfavorable Loan Terms: Allows for the cancellation of the deal if the real estate
investor is only offered poor terms, bad interest rates hurting deal liability
o Pay Attention to Loan Terms:
 Loan amount might be specified in contract certianly for standard Realtor
contract but the loan amount applied for could be higher than purchase
price - but realtors and clients often don't think about how this should read
before attorney review
 Similar - length of term and type of loan might be incorrecly inputted
o Ideally buyer can just walk away if they decide it is not acceptable
 Appraisal Contingency:
o Might be baked into due diligence and/or not agreed to as buyer is a
"sophisticated party".
 o Can be used even if mortgage is approved, still allowing for an an "out" of the
deal if there is a problem, or even if buyer still wants the property, leverage to re-
negotiate to a better profit margin
o Try to get an appraisal contingency based on after repair value or as well as
purchase price (clients often don't know and I don't know - so can shoot for both):
"If the Property “as-is” appraises for less than $410,000.00, or the after-repair
value of the Property appraises for less than $600,000.00, the Buyer may request a
new purchase price. In the event the parties are not able to agree on a new
purchase price, the Buyer may cancel the Contract with the return of all deposit
monies."
o Investors might be contractors or money/deal guys. Appraisal contingency helps
assure profitability, and prevent the buyer from overextending and incurring
losses/defaultsin the event of (i) they were wrong about ARV upon entering
contract, or (ii) market values deteriorate.
 Assignment Clause:
o Allows for the contractual rights and responsibilities of the buyer to be legally
transferred to a third party or a newly formed entity. Investors investorsmay need
to shift the purchase responsibility from their personal name to a business entity
after the contract has been signed, but before closing.
o Language should not only addresses assignability, but also specify may close in
newly formed eneity
o Pro Buyer: "It is expressly agreed that notwithstanding any other provision of
this Agreement, the Purchase reserves the right to assign this Agreement to any
other entity prior to closing, and close in the name of a newly formed eneity,
without the prior consent of the seller."
o Pro Seller: "The Buyer reserves the right to close this transaction in the name of a
newly formed entity. If applicable, the Buyer must provide Seller with written
documentation showing proof of control or ownership of two weeks prior to
closing. Buyer shall remain personally liable for all obligations under the
Agreement."

Sixth Slide Set - "Financing Documents"

 Challenges With Reviewing Financing Documents

o Documents Recieved After Deal Contingencies Satisfied:
 Buyer selects lender early in the process based on rate and costs, before
lender will produce the loan documents for review.
 Lender may not release documents until an attorney is assigned to the file
(typically after the mortgage commitment).
 Little time to review loan documents as the short closing time means
closing in a few days after mortgage is ready.
o Not Negotiable: Documents are often "take it or leave it" with little to no room to
re-neogitate heavy handed terms. Sometimes the attorney for lender will
accomodate a change and/or give a clarification in writing client may save in the
event of interpretation disputes in the future.
o Attorney Concerns: Fee Structure / Skillset:
  Take many hours to review these agreements as they are complex and
unique - but residential transactions are often flat fee. Recommend
charging more or unbundle from legal scope of work.
 For practitioners more focused on residential than commercial, may
require legal research or colleague consultation depending on what is in
the documents. However, given documents are not negotiable, to some
degree the client is at the mercy of the lender.
 List of Financing Documents
o Loan Agreement: Binding contract between borrower/lender that outlines the
relevant loan terms, including the loan amount, interest rate, payment schedule,
representations, etc.
o Promissory Note: Promise to repay the loan in accordance with the loan
agreement.
o Mortgage: Public document that secures the property as collateral for the loan
and gives the lender the right to foreclose in events of default.
o Commercial ("Personal") Guaranty: Individual managing the buying entity
unconditionally gaurantees performance of loan obligations.
o Guaranty of Completion and Performance: Borrower guarantees conducting
scope of work/rehabilitation plan, standards of quality and works, and completion
dates.
o Pledge and Security Agreement: Buyer "pledges" the real estate as collateral for
the loan.
o Membership Interest Certificat: Borrower epresents their interest percentage in
the purchasing and pledges that interest was security.
o Agreement to Provide Insurance: Borrower agrees to obtain insurance
acceptable to the lender
o Assignemnt of Contracts, Plans, and Permits: Borrower assigns to the lender
agreements/plans with contractors, permits, and licenses.
o Environemntal Indemnity Agreement: Borrower agrees to reimburse the lender
for any loss, liability, claim, damage, or expenses arising from environmental
conditions on the property.
o Repair Fund Reserve Agreement. Borrower agrees to set aside money into a
reserve fund that the costs of specified improvements to the property. Ensure that
funds are available to complete necessary repairs and protect the lender's interest
if the borrower fails to complete the repairs
o Entity Consent Documents: Authorizes that signor may buy the buying entity.

Seventh Slide Set: "Hard-Money Settlement Statements vs. Standard Residential"

 Loan Amount: May be greater than the purchase price as based on ARV
 Construction Holdback:
o Loan funds that are not released to the borrower upfront, but 'held back' by the
lender. The hold-back ensures sufficient funds remain available for the
completion of a construction.
o Holdback distributed in increments ("draws" as the work progresse) released after
the completion of certain phases of the construction or renovation work.
 o Safety measure for lenders by reducing their risk of lost or mishandling funds, and
ensures buyer has incentive to complete project diligently and on time.
 Borrower Paying Legal Fees: Borrower often pays lender attorney fees - may be able to
re-negotiate down if rate is excessive by challenging reasonableness and requesting
statement from attorney.
 Interest Reserve:
o Portion of the loan proceeds set aside for the purpose of paying the loan's interest
payments during the loan term.
o Useful where the buyer does not have regular cash flow on the property to make
payments during construction period, and protects lender to continue receiving
interest payments
o Based on the loan's interest rate and the estimated length of time it will take to
complete the construction or renovation.