Hard Money Lending…the name seems to imply a sort of predatory lending; excessive fees and rates, grandmothers thrown out in the snow for one missed payment and ruthless collection tactics. But Hard Money Lending, also known as Private Equity Lending, is none of these things. It is, in fact, a type of “makes sense” lending that traditional banks simply cannot offer.
There are many reasons people turn to Hard Money loans; speed, credit problems, probate and construction, just to name a few. The best way to explain what Hard Money lenders do is to provide a real-world example that is happening all over this country right now:
Pretend you’ve found a foreclosed home in an average suburban neighborhood where the average home sells for $250,000. This foreclosed home is in pretty bad condition; leaking roof, missing windows, broken furnace, etc. The bank that owns the property is willing to sell it for $100,000 as-is. You’ve done your research and know that $25,000 in repairs will fix all the problems and bring the value of the property up to the neighborhood average of $250,000. You’ve got a 10% down payment and the extra cash to complete all the repairs but the bank declines your request for a loan because the property is in “sub-standard” condition. The fact is, most banks won’t lend on a property in sub-standard condition, no matter what the plans for repairs are. So what do you do? This is where Hard Money lending can save the day.
The Hard Money lender will do many of the typical things a traditional bank does; run your credit, verify your income and that you have the money to make the repairs. But one way they differ from a traditional bank is how they value the property. The Hard Money lender will value the property based on what it will be worth once the repairs are completed, then they’ll make a loan based on the “fixed-up” value. Once they’ve verified that the home will be worth $250,000., that you have the money and the plan to make all the repairs and a realistic plan to either sell or refinance to a traditional loan, they’ll make that “makes sense” mortgage, and they’ll do it quickly.
Hard Money loans are never intended to be long-term solutions. These types of loans are always meant to be short-term in nature and the borrower’s exit strategy is key. Foreclosing on a mortgage is an expensive and time-consuming endeavor for any lender, and Hard Money lending is designed to avoid this event. This is why they don’t lend to 80% or 90% of the property’s value. The goal is that the borrower/property owner have the best chance possible to be able to sell the property at a profit or refinance into traditional bank financing.
Interest rates are higher than typical bank rates and so are the fees. Today, one can expect a rate anywhere from 10% to 18% depending on many risk factors while fees typically range from 4%-5% of the loan amount and generally between 3-6 months interest must be paid even if the loan is paid off in 1 month. Think of these transactions as renting money for a potential profit or benefit that will outweigh the costs of the financing. A good Hard Money lender will never make a loan that will not benefit the borrower as well as the lender. As with any type of financing, shop around. Lenders can vary greatly in not only interest rates but also the types of properties and situations they’ll finance. An Internet search is a good way to locate Hard Money lenders in your area. Lastly, as with all types of lending, read and understand everything before signing on the dotted line.