The Hard Facts about Hard Money Lending
Private lenders have been around for, well, ever: as the saying goes, lending money is the second-oldest profession. In advanced economies today, private or “hard money” loans are used by real estate investors ranging from professional renovation investors with excellent performance records to desperate last-resort borrowers with terrible credit histories.
While there remain some back-alley loan sharks around doing shady deals with desperate investors who aren’t responsible enough to borrow from anyone else, most hard money lenders are open, ethical businessmen and women with real estate acumen and extra cash to invest. There are even some formal banking institutions who engage in hard money lending.
Here are some cold, hard facts about the hard money industry to help you determine if hard money is the right money for you.
Fact #1: Hard money deals are often sought after for their quick turnaround (usually within 7-14 days to process). Any investor interested in flipping a property knows that time is of the essence and needs to have funding available sooner rather than later.
Fact #2: One way in which hard money lenders differ from more conventional lenders is in the fact that many hard money lenders tend to be local and more hands on in terms of wanting to view the property before lending money on the deals. Hard money lenders want to get that up-close-and-personal look and feel for a property before making a decision to lend on a property.
Fact #3: Hard money loans are generally much more expensive overall than conventional loans for both the interest required on them as well as points the buyer is expected to pay on them. Generally speaking, investors seeking hard money can expect to pay anywhere from 10 to 20 percent interest and get hit with as much as eight points with some lenders in some states.
Fact #4: Hard money loans are most often sought by investors doing short term deals rather longer term deals. Most hard money lenders will lend from periods of six months up to a few years.
Fact #5: While the red tape is certainly less and the turnaround time is much faster, more hard money lenders are taking a closer look at borrowers' experience and credit history. After the real estate crash of the late '00s, many lenders were triply burned, as borrowers defaulted, but foreclosures were slowed to a crawl for political reasons, and values had crashed. So while ten years ago lenders were more open to lending money as long as there was sufficient equity, today they tend to be more conservative and screen out rotten-apple borrowers more thoroughly.
Fact #6: Most private lenders require borrowers to use a specific appraiser who the lender knows and trusts, who will not be swayed by the investor's pleas for padding the value.
Fact #7: Most hard money loans are structured very similarly to balloon payments with due dates usually spread over no more than one to two years after the loan is issued.
If you are interested in seeking a hard money loan for your projects, here is a directory of hard money lenders.
Have you ever used a hard money lender for any of your deals? If not, would you ever consider it in the future? What are some other unconventional ways have you used to finance your deals?