Hard Money Lenders-Bridging the Gap
Would you lend money to a small company purchasing an office building short on cash for the closing? Would you lend to an investor who owns an apartment building and needs money to renovate the units?
For hard money lenders, this is just another day’s work.
Private hard money lenders are private investors and commercial hard money lenders providing short-term loans for non-traditional real estate purchases, such as investment property, or for a buyer that needs to close on a property fast. Because these loans are based on the property’s equity, hard money lenders usually cover a small geographic area so they can inspect the property and determine if the property value justifies the loan.
Unlike banks or mortgage brokers who have stringent income and credit score requirements, hard money loans are based on property equity. The substantial paperwork and red tape normally found with traditional lenders is eliminated and credit scores play a very small role in the process. Las Vegas hard money lenders can close a loan up to $10 million in 2 to 10 days if the property has sufficient equity. The golden rule of hard money lenders: if there’s sufficient equity, theres a loan.
But the piper always gets paid, and hard money lenders charge dearly for their services. Don’t expect to see the 6 to 8 percent interest rate you’d get from a bank or mortgage broker. Hard money interest rates can start at 15%, 18% or higher. Then there’s the lender’s fees-5% or higher loan origination fees, lender inspection fees, document preparation fees, document warehousing fees, servicing fees, funding fees, closing fees and more will add thousands of dollars to the total amount you want to borrow. For example, a $100,000 loan at 7% amortized over 30 years has a monthly payment of $665.30, but the same loan at 18% is a hefty $1,507.09! This should give any prospective borrower pause to determine if the benefits of a hard money loan are worth the cost.
Something else to watch out for is the properties’ appraisal value. Since hard money loans are normally for only 60-75% of the after repaired value or the market value of a property, a higher appraisal translates into a higher loan value and, naturally, more money for the borrower. While this sounds good at the onset, an appraisal at or higher than the actual market value will make refinancing the hard money loan difficult if not impossible. To protect yourself, go to the county property appraiser website and see for yourself what similar properties near yours sold for 3 to 6 months ago. You can also contact a real estate agent and request they do a C.M.A. for you. And before signing any loan documents, ask to see the appraisal to be sure that the value assigned by the lender’s appraiser is in keeping with the actual market value.
Prepayment penalties can be another major obstacle to paying off or refinancing a hard money loan. You may need a hard money loan for just a few weeks, but if the loan documents include a prepayment clause, you may find yourself trapped in a high interest loan for 6 months or more. Or, the prepayment clause may charge significant fees for paying off the loan early. Before signing, check to see if any prepayment penalties are something you can live with.
Hard money loans can be the bridge to closing the deal or purchasing investment property. But as with any loan, make sure you know what you’re getting into before you sign.