Hard Money Can Get You Faster Deals, Bigger Properties
You've found a great property. But you need ALL CASH to close quickly before other investors grab the deal. And you don't have nearly enough money on hand.
Furthermore, your credit score is lower than the I.Q. of a mosquito and there's no chance a bank will loan you a dime.
Are you out of luck?
Not at all. You have a resource that's older than the banking industry itself: the hard money loan.
Hard money is also known as "private money" because it comes from a private individual, company, or investment pool. You can have your money in a couple days as opposed to a month or more. Being able to tell a seller that you can close in a week and pay all cash gives you tremendous negotiating power.
The reason that hard money is available so quickly is that private moneylenders don't look at your employment history, income statement, or credit score. They make their decision based solely on the collateral for the loan. Which in your case is the real estate that you're purchasing.
Typically, hard money lenders will give you 65% to 80% of the property's value. In today's foreclosure heavy market where properties can sell for 50% or more below value, a hard money loan could cover 100% of the cash you need.
Hard money loans are for a shorter term than conventional bank loans. Typically, hard money loans peak out at 24 months. But they can be much shorter. A hard money "bridge loan" can be for a period of days and is often used to close a deal while the buyer's conventional bank loan goes through its snail paced approval process.
For some borrowers, "hard money" has come to mean bridge loans, whereas "private money" has become more closely associated with longer payback periods of 1 to 5 years. For clarity, be sure that whomever you're dealing with understands exactly what you mean when you use a generic term like "private money."
Here's a short list of the main risks and rewards of hard/private money.
Risks
- Private money loans are short-term. Unless your plan is to flip the property, you'll need to still find long-term financing.
- You really must know what you're doing. You get your money fast, but you could also lose the property fast.
- If your property is foreclosed, you less protection and recourse than property owners with bank mortgages.
- The industry is not as regulated as the banking industry. Borrower beware.
Rewards
- Most lenders are online and thus it's easy to shop rates.
- Hard money interest rates do not fluctuate from day to day like mortgage rates in the institutional market.
- Less "red tape." No personal credit check, employment check, income check.
- The property is the total collateral. If you have a strong property, hard money should be no problem to acquire.
- You can get the money fast. Sometimes within 24 hours.
- Unlike banks, hard money lenders value a property based on ARV (after repair value).
- Hard money lenders will take risks that banks will not.
- Private money lenders will fund large projects. This can be your opportunity to enter the major leagues.
Don't shy from seeking private money. If you find a great property, negotiate a savvy deal, and have a solid exit strategy, you shouldn't have any problem presenting your plan to private lenders and getting the funds you need.
Hard Money Can Get You Faster Deals, Bigger Properties
By: Dave Lindahl
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