The most special items are rehab loans for real estate investors. You may want to check out DFW Investor Lending for more. They are designed to meet the needs of an investor in fix and flip, and provide a variety of features unique to this form of loan. Usually, conventional hard money loans will not fulfill the short-term real estate investor’s needs, and so a different product is needed.
The key differences between rehab loans and ‘traditional’ hard money loans include the duration of the contract, the penalty for prepayment, a rehab account managed by a fund and a reserve account for prepaid interest. All of these characteristics must be there to ensure not only the performance of real estate investors, but also to ensure that private investors lend funds the protection they need when investing in initial trust deeds.
Looking at these distinctions, the first one is the span of the word. The majority of repair and flip loans last anywhere between six and twelve months. These are not intended to be long-term solutions, but rather bridge funding in the short term to allow the investor to purchase, rehabilitate and sell the land. Many have an extension feature, where the loan at the end of the term may be extended for a fee. Generally speaking, the project has not gone according to plan if the extension is required.
Secondly, the penalty for prepayment varies from the normal transaction for hard money. Many of these forms of loans have a penalty of some kind for prepayment. This is to guarantee a return to the private cash lender who loans the capital. The average lender would not be pleased with a single month’s return on the loan if money is borrowed, and paid back after a month. However, with these short-term loans, the intention is to get out as soon as possible. For this reason, they are designed with no penalty for advance payment. However, the trade off for this is that the cost of these loans is higher upfront with no prepayment penalty.
A very significant feature of these types of loans is the fund management account, or construction control account. This is a trust account or escrow account where the property is kept with funds for the work to be completed. It is necessary to monitor these funds to ensure that the property is repaired since the money is loaned using an after-repair value. The disbursement of these funds can be very widespread, so be sure to negotiate with your representative how you can access the rehab costs of your funds.