What is a Hard Money Loan?

Hard money is often the only option outside of traditional lending for distressed properties or properties that require a timely close. Hard money loans are primarily short term notes to individuals investing in residential or commercial real estate. Borrowers often use the capital from a hard money loan until they can sell or secure conventional financing for the property.  Hard money loans are processed more quickly than traditional financing, which makes them ‘as good as cash’. This also allows borrowers the leverage to acquire properties that require all cash transactions.

The Allure of a Hard Money Loan

Part of what makes hard money so alluring is its equity-based nature.  Rather than basing loans on a good credit score, lenders examine the property and the project. In fact, their lending criteria are typically quite different than traditional financing.  Individuals that own multiple properties may see their credit score drop when they are required to pay a huge number of minimum monthly mortgage payments. This type of investor would be unable to meet criteria set by banks, but that shouldn’t disqualify them from securing financing.  In the event that investor wishes to expand their holdings with an additional property, they will typically use a hard money lender.

Apart from their equity based nature, hard money loans allow borrowersto use funds for renovation expenses. This is a huge advantage to investors.  Most foreclosed or distressed properties have equity potential, but the value is often disguised by the less-than-attractive condition of the property.  Average borrowers overlook these properties because of their initial appearance.  Investors create margin by finding, acquiring and renovating these properties.  The ability to finance the purchase and repairs is a key part of this equation, and hard money loans factor in the renovation costs to the value of the home.

Uses of Hard Money Loans

After the property is acquired and renovated, the investor can either hold their property or ‘flip’ the property. In the event they are interested in renting the commercial/residential/industrial property, they can pay off the hard money loan and seek a conventional lender for permanent financing.  The renovations have presumably increased the value of the property, and the refinancing lender can use the new appraised value in determining the new loan amount. Often the new appraisal will be high enough for the investor to refinance the balance of the hard money loan without any additional money out of pocket.  And in the event they are interested in selling, they can pay off the loan from the proceeds of the sale. By flipping the property the investor pockets the difference between the new and old value of the property, after paying the hard money lender.

Hard money lenders can also fund projects thatare overlooked by commercial banks and financial institutions. This includes real estate property such as dry cleaners, gas stations and strip malls.  Even corporations, LLCs, and partnerships have a hard time securing financing for these particular projects.  Hard money loans have clearly defined loan terms and well defined exit strategies. Depending on the loan scenario, hard money loans can be tailored to fit individual borrower needs.

Is Hard Money different than Private Money?

Private money is synonymous with hard money.  Hard money loans are also known as bridge loans or construction loans.

Sometimes friends, family,and other real estate professionals refer to themselves as Private Money. They are trying to differentiate themselves from Hard Money.  The real difference is twofold: experience and structure. Those ‘private money’ individuals do not do this for a living and do not have a track record or know the potential risks in lending. They lack the formal training and experience real hard money lenders have.  ‘Private money’ individuals may also require their money before the maturity date, or may change the terms of the loan.

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