WHO ARE YOU GOING TO CALL? WHY A HARD MONEY LENDER MIGHT BE YOUR
FIRST STOP
WHO ARE YOU GOING TO CALL? WHY A HARD MONEY LENDER MIGHT BE YOUR
FIRST STOP
It isn't uncommon to hear mortgage industry insiders refer to
hard money lenders as a last resort. While this may be true to
the extent that many borrowers who solicit loans from hard money
lenders do so as a last resort, there are many cases in which a
hard money lender may be sought before a traditional banking
institution. Let's take a look at some scenarios where a hard
money lender might be a first stop instead of a last resort.
COMMERCIAL REAL ESTATE DEVELOPMENT Let's say a real estate
developer has sunk $10 million into a development deal and
originally planned to sell units in January and would then begin
to recoup their investments dollars from the project. As is the
case with many such endeavors, delays may push back the
beginning sales date or the project may go over budget, leaving
the developer with a cash negative situation. The developer now
must take out a bridge loan in order to get through his cash
poor period in order to "survive" until the project begins to
realize a cash positive position. With a traditional loan, the
bank would not push through the loan for the borrower for four
to six weeks. The developer would default on his original loan
or would not have cash on hand to finish up the project. The
developer needs cash right now and oftentimes needs the cash for
only a two to four month period. In this scenario, a hard money
lender would be the perfect partner because they can provide a
loan quickly and efficiently.
REHAB INVESTOR Another example of a hard money scenario is a
rehab investor who needs a loan to renovate run down homes that
are non-owner occupied. Most banks would run from this loan
because they would be unable to verify that the rehabber is
going to be able to promptly sell the units for a profit --
especially with no current tenants to provide rent to handle the
mortgage. The hard money lender would, in all likelihood, be the
only lender willing to take on such a project.
FLIPPING PROPERTIES Another group who may use hard money lenders
as a starting point as opposed to a last resort are real estate
investors looking to "flip properties." If an investor locates a
property that they deem to be a great value, they might need
quick and secure financing to take buy, renovate and sell the
property quickly. Anyone looking to flip real estate does not
want to hold on to the property for a long period and the short
term loan from a hard money lender will accommodate this need.
The loan may also be structured as interest only, keeping the
expenses low. Once the property is sold by the individual who is
flipping the property, the principal is paid back and the profit
is kept or reinvested into the next project.
A BORROWER IN FORECLOSURE One final scenario of hard money
involves someone who finds themselves in foreclosure. Once a
homeowner falls behind on their house payments, most lenders
will not provide them with a loan or restructure their current
loan. Occasionally, an individual who is facing foreclosure will
obtain a hard money loan to avoid foreclosure proceedings and
use the time to sell the property.
The question remains why would hard money lenders loan money if
a traditional bank wouldn't even consider such a gamble. The
answer is two fold. The first is that hard money lenders charge
higher rates than traditional lending institutions. The second
is that hard money lenders require the borrower to have at least
25-30% equity in real estate as collateral. This insures that if
the borrower defaults on their loan that the lender can still
recoup their initial investment.
A hard money loan is essentially a marriage between a borrower
in a tough spot (either from a time sensitive perspective or due
to their poor financials) and a lender who is risk adverse and
is willing to take a chance for a higher return. While hard
money loans may be a last resort for many, there are plenty of
scenarios when hard money is the only way to go.