When you hear “hard money loans,” you might picture money changing hands in a dark alley and rough collection techniques when the loan comes due. However, that could not be further from the truth as hard money lending can be a very valuable and useful tool in many real estate transactions.
In the “regular” real estate financing world, mortgage lenders for one- to four-unit properties usually need to follow strict guidelines and procedures set out by entities like Fannie Mae or Freddie Mac. Following those guidelines naturally takes time – and in a hot market, time can make the difference between whether an offer on a piece of real estate is accepted or not. Hard money lenders use their own money or closely affiliated investors to lend. This enables them to make quick decisions on loan approval and funding. Hard money lenders are typically collateral-based, which means they look to the property to secure the loan. Hard money is generally only available for an investment property, and not for owner-occupied properties.
Hard money is short-term financing, not your 30-year home mortgage. So why would you want to use hard money?
In a hot market, time is of the essence and buyers often will compete with cash buyers who can close quickly. Having a pre-approval with a hard money lender can level the playing field, enabling the buyer to submit a winning contract.
Renovation or fix and flip
A property in need of serious renovation often will not qualify for conventional financing. Hard money is a way to get the property purchased, then structure cash draws to complete the renovation. Once the renovation is complete, the property could qualify for conventional financing or be prepared to be sold.
Hard money lenders don’t need to fit into a certain framework or criteria. They often can structure a custom refinance to create a path to meet a particular goal.
Advantages of hard money
• Speed of decision making – typically, a decision can be made in a week or less. Hard money lenders make their own assessments and typically don’t need to wait for things such as an appraisal.
• Speed of funding the loan – there is no long process to get funding for closing.
• Flexibility – the loan can be structured in a variety of ways.
Disadvantages of hard money
• Upfront expense – a loan fee is charged up front that is higher. Remember, you are paying for speed and flexibility.
• Higher interest rate – the interest rate is higher than what you would get on a 30-year mortgage.
• Shorter term – hard money loans seldom exceed a one-year term.
Every transaction is different. As a borrower, you will discuss and agree upon all the terms of the loan, such as the down payment required, all fees, interest rates and terms. The lender will secure the loan with a deed of trust against the property to be used in the event of default.
Using hard money can be a helpful strategy for buying property and building a real estate portfolio. Taking the time to research and acquire knowledge about hard money can put a very valuable financing tool at your disposal.
By Duane Duggan. Duane graduated with a business degree and a major in real estate from the University of Colorado in 1978. He has been a Realtor® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.