What is Hard Money?

Monday, 22 November 2010 Marcel Umphery

A hard money loan is defined as a loan by which a borrower receives cash or funds that are secured by a piece of real estate. Typically hard money loans are issued at high interest rates – much higher than your typical traditional residential or commercial property loans. And on top of that, hard money lenders typically have pretty tall LTV requirements. If you’re looking for a hard money loan, you’re going to probably only get 50 to 65 percent of the value of the real estate in actual loan dollars. So why would anyone be interested in a hard money loan?

First of all, if you or one of your clients is purchasing a piece of investment property, sometimes the sales price can be well under the value of the property itself. Let’s say that a hard money lender can loan you 65 percent of the value of the property, called 65% LTV. If you can put a piece of property under contract for 35% less than its value on the market, then you can use a hard money lender to purchase your investment property. For example say you find a property worth 100k that needs 15k in repairs for sale for 20k, this would be a deal a hard money lender would most likely fund because it fits there lending criteria. So using a hard money to fund you or you clients deals can be especially helpful if you’re purchasing property to “flip” or resell quickly.

So what are the disadvantages of a hard money loan? The first is as indicated earlier – the LTV is not going to be as good as it would be through traditional financing. Traditional financing can give you up to 80 to 100% of the value of the home in some cases, but a hard money loan is like going to the pawn shop – you’re going to get a substantial amount less than the value of your property. Second the interest rates are always higher always a few points higher than that which is on the traditional loan market. For example, current loan rates for a home may be 5.25% on the market, but if you’re a real estate investor looking to secure a hard money loan you could pay double or even triple that amount. So if there are all of these disadvantages in cost, why would real estate investors EVER choose a hard money loan?

The fact is you can’t always find financing for creative real estate deals through traditional means. Hard money loans are an “outside the box” option to obtain money, but it costs more. With a hard money loan you might have to fill out less paperwork, and provided you have the assets you can get funded a lot faster than traditional, government regulated means. So if you have a fast-moving, sure-fire way to make money buying and selling a piece of real estate in short period of time a hard money loan might be a good way to get a deal closed.

Hard money isn’t always the best way to finance a piece of property – for example, if you’re planning to buy and hold. But if you’re looking to create an opportunity and close a deal FAST, hard money may be the way to go. If you have private investors that c an help you with 90 percent of the deal but you need an extra 10 percent, hard money may be the way to go. Remember that there may be higher points and interest rates than through traditional loans, but if you go hard money you’ll have flexibility that you don’t through other methods.

Happy Wholesaling : )

Marcel Umphery