Hard Money lenders are misunderstood
As a hard money lender, I feel like I’m constantly educating people about my business. First off, people try to tell me there is a difference between a hard money lender and a private lender, but I don’t see it. Simply put, a hard money loan can only be issued by a private lender. A hard money lender can be lending company backed by investors or it can be just a single individual lending his/her own money to a real estate investor. I tend to believe that the market defines a private lender or private money lender as a person lending their own funds. Banks or conventional lenders are regulated, private lenders or hard money are not. Given that hard money lenders are unregulated, they have the flexibility to customize their loan program guidelines as they see fit. I like to call it common sense underwriting vs check the box lending. The term hard money came about because these lender would primarily look at the “hard asset” or the value of the real estate as their source of repayment. I use the term “hard money” in my writing and marketing materials so people immediately know what I do. It’s a recognized term, but not always a welcome one from my perspective because there is definitely a stigma that surrounds the term hard money. In this article I’m going to address the stigma head on and debunk what I see as the 5 major myths of our hard money loan program.
#1 – Borrowers that use hard money lenders are desperate, not bankable, or have bad credit.
This couldn’t be further from the truth. Sure, hard money lenders come in all shapes and sizes, so there are lenders out there willing to take on a borrower as long as the value of the real estate supports their loan and the borrower has a pulse. However, I can’t tell you how many borrowers come to me simply because they can’t stand the amount of paperwork and lengthy process of obtaining a conventional loan. The number 1 reason borrowers come to me is for speed, not because they can’t get a bank loan. One of the first hard money loans I closed was a $250,000 loan on a vacation rental property worth $1MM+ in Newport, RI. The borrower had just purchased the house in cash for $850,000, had perfect credit, and he actually had a bank commitment in hand. He came to me because he just wanted construction funds fast without the hassle of dealing with a bank. He was willing to pay a higher interest rate because he knew that he could finish the renovation with our funds before the bank could even close their loan.
#2 – Hard money lenders are loan sharks or they loan to own.
I want the borrower to be successful and my hard money loan to be repaid so I can use those same funds make new loans. I don’t make loans that are doomed to fail, whether it be providing too much leverage, or charging interest rates that the borrower/deal can’t afford. I definitely do not want to take back or foreclose on your property. The process of foreclosing on a house is costly and it takes a lot of time. If I have to foreclose, I want to make sure the property will sell at auction for greater than my debt. Otherwise, I have to step into the borrowers shoes, complete the renovation, and then market/sell the property. Meanwhile, I’m not earning interest or any compensation for my time and effort, and it takes me away from closing more loans.
#3 – Private money loan interest rates are too expensive or cost prohibitive
Hard money lenders charge higher interest rates, there is no doubt about it. That said, I believe the spread between conventional rates and hard money rates is more than made up by our speed. Experienced real estate investors understand time value of money and opportunity cost. Often times our hard money loan program allows our borrowers to act quickly and buy a property for less. Our fix and flip borrowers can purchase and be almost finished with their renovation before they could close a conventional loan. In today’s market, buyer demand is so high that you may not even be able to compete in purchasing a property without hard money financing. My borrowers use our hard money loan program to present sellers with a cash offer. Most sellers are looking for a fast closing with no financing risk so my borrowers have a competitive advantage.
#4 – Hard money lenders don’t need a lot of documentation
Hard money lenders will absolutely need information about the project approve and close your hard money loan. However, the amount of paperwork is far less than conventional lenders as we care most about your investment experience and ability to execute the strategy. Hard money lenders typically won’t take a deep dive into the borrower’s financial condition, ask for tax returns, or ask for financial statement. We don’t verify employment, look at debt to income ratios, or ask for pay stubs. However, we will want to make sure the borrower has enough liquidity for the down payment and working capital for construction. I’ll ask first time borrowers to fill out a 5 minute online application, and provide me with an experience worksheet. If you are looking for a fix and flip or a construction loan I’ll ask for a detailed budget. If you are a builder looking for funding for ground up construction, I’ll ask for plans and a general outline of your finished specs. Regardless, hard money loan programs are designed for speed and efficiency, that’s what you are paying for.
#5 – Hard money lenders make risky high leverage or no down payment loans.
Borrowers come to me seeking 100% financing all the time. I often hear “I’m buying the property at a significant discount, and the after repair value puts you at 70% LTV without an investment on my part”. I laugh because most of the time these properties are being actively marketed on MLS. The real estate market has never been more efficient, and therefore determining value of a real estate investment has never been easier. Given the number of platforms available nowadays, a property that sells on market usually will sell at its market value. Regardless, hard money lenders want “skin in the game” on the part of the borrower. They want the borrower to have an investment in the property that is material enough that they will protect that investment in a downside scenario. We size our loans at 85% of the purchase price, 90% loan to cost (LTC), and up to 75% loan to value (LTV). That requires the borrower to invest at least 15% of the purchase, or 10% of the total project at closing.
There is no doubt that hard money lenders come in all shapes and sizes. As a borrower, it is important that you know exactly who your lender is and how they get their funding. We have our own money to lend, so we are a direct hard money lender in its purest form. We make the decision to approve your loan, we fund the loan at closing, and we fund construction draws. There are a lot of lenders who will tell you they are a direct hard money lender, but they aren’t. They are glorified loan brokers who don’t have their own money to lend so they sell your loan.
My name is Michael Chadwick. Experienced real estate investor come to us for speed, flexibility, and my ability to understand local markets. I am actively lending and would love the opportunity to finance your next real estate investment. We have many hard money loan programs to offer so reach out to me today!