To work through an example, let's say a property, after fix-up, would sell for $500,000. Take 70% of that. (Some now are down to 65%). So a hard money lender would lend you $350,000. That's to purchase the house and to do any needed repairs.
Hard money is quite expensive--generally around 5 points (that's what really hurts) and 12%-16% annuallized...although many hard money loans are for just six months. So, on the property with an ARV of $500,000, a hard money lender might lend you $350,000, and charge you $17,500 in points and $3,500 a month in interest.
Remember: You have to pay the points up front, and you'll also need money for the rehab. It's certainly possible to do it without any or much money out of your pocket--say you can acquire that post-rehab $500,000 property for $275,000. You'll "receive" $350,000; you can pay your $17,500 in points from that and still have around $50,000 for the rehab. Note that if the hard money loan includes money for a rehab, the lender will set up "draws" so that the money is released at 3-4 different stages, as the work is completed.
There are also some not-quite-hard-money lenders, such as Brookview Financial. There's also private money out there--generally around 12%, but with far fewer points. Usually, though, you'll need a track record to borrow from private lenders.
Hope that helps.
The lender establishes what the After Repaired Value of the property will be given the renovations you plan to do. They will then lend you 70%, 80% or 90%, whatever their guidelines are, toward the purchase and repair. There are quite a few lenders out there who offer different max loan amounts and loan terms depending on the credit and capacity of the borrower. If you have excellent credit and some cash in the bank, you could borrow as much as 95% of the ARV and pay fewer fees, if you have challenged credit and no liquid assets you may be capped at 60% or 65% and have to pay significant fees.
Basically, an ARV (After Repair Value) Loan allows you to borrow a certain percentage of what a property should be worth after all the repairs are complete. For instance, you borrow $240K for a distressed property on the market for $175K which, after all the repairs are done, should be worth $300K.
These type of loans are usually difficult to get because you need a high FICO score of around the min 600s. Yet you could also tie it into an interest only loan if you're going to fix up and resell the property quickly.
Hope that helps. Good luck!
Terrence Charest, e-Pro
Century 21 Associates
905 Easton Road
Willow Grove, PA 19090