How Fast Can You Repay Your Hard Money Loan?

“I need a hard money loan for three months maximum,” I hear our potential borrowers say all the time. “I have the right partners, the right contractors and we will be moving fast.” “How many properties have your flipped in the last two years?” I always ask them. The answer is typically none.

As a hard money lender, I am all for hard-driving borrowers who are willing to pour their energies into a project. You’ve got to have enthusiasm and optimism when you are an entrepreneur of any kind, not only a real estate rehabber. But you also need to have a healthy dose of realism. Unless you consistently finish and sell your rehabs within three months, don’t base your numbers on hopes and aspirations. Instead, base them on an average turn-around time of six to nine months seen by other rehabbers. Challenge yourself to do it in a shorter time and if you do – consider it a bonus. Establish a track of record first. Once you consistently rehab and sell properties in less time, start basing your next projects on your personal record.

If you are basing your hard money loan profit projections on the best possible scenario, you are likely to be disappointed.

Let me explain why the chances of repaying a hard money loan within three months are slim by reverse-engineering the process. In today’s market, your buyer will need at least forty-five days to secure financing. That is if everything goes smoothly. Have their financing fall through and you are looking for another month and a half before you can repay you hard money loan. But let’s assume you’ve got an extremely qualified buyer who’s cruising through the underwriting process. If your aspiration is to repay your hard money loan in three months, that means you have just forth-five days to finish your property and get it under contract.

How fast you can repay your hard money loan depends on both of how fast your rehab moves along and on the market conditions in your area.

In real estate, marketing time is measured in days on the market, commonly abbreviated as DOM. The days on the market start when you realtor activates your property in MRIS. They end when your contract is ratified. For example, in January of 2018, it took forty-eight days to put a house under contract in Montgomery County. At the same time, it took fifty-six days to ratify a contract in the city of Baltimore. The Washington DC real estate market is hot, but it still took 37 days to get a contract there. Yes, your property is fully renovated and it makes it more appealing than an average listing. However, you would still need to budget at least three to four weeks to find and negotiate with a suitable buyer. We now need to subtract this time from the remaining forty-five days. It leaves us with around twenty days tops to finish the entire rehab. Can you really do it?

Your rehab project depends on many people. Be realistic about their schedule.

Those twenty days can be unpacked even further. It will take your realtor a day or so to list the property. If you are using a professional photographer to take flattering pictures of your rehab, you need to budget at least a couple of days to work around your photographer’s schedule. Landscaping is the last thing to be done in every rehab and takes at least three days to arrange – even if the work itself can be done in a day. So, our actual renovation time is reduced even further – to two weeks or so.

Truth to be told, we have a long-term borrower who typically repays his hard money loan within three months. He is an experienced rehabber who averages ten rehabs a year. He has time-tested and dedicated contractors who – because of the sheer volume of his business – are financially dependent on him and willing to go the extra mile. The properties he buys are on a smaller scale. His main strategy is to buy-and-hold making his rehabs limited in scale. He is not trying to wow potential buyers with granite counter tops and best appliances. His main goal is to provide clean, functioning, safe and affordable homes to his renters. Perhaps most importantly, he repays his hard money loan by refinancing them once his rehabs are completed. That means he is not wasting any time marketing his properties.

This example is a single consistent exception to the rule that I’ve seen as a hard money lender. As we discussed in our previous blogs, basing your profit calculations on the best-case scenario is a sign of an inexperienced investor. Inexperienced investors are bound to learn from mistakes. My hope is that you learn from somebody else’s mistakes and not yours. Give yourself a plenty of time to finish the job right. Do not dilly-dally, do not procrastinate, move with a purpose and the sense of urgency. But whatever you do – face the reality and plan for it.

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