Is Hard Money Easy?
Hard money loans consider the value in the property itself. There is little or no concern about the credit worthiness of the applicant. Sometimes some hard money lenders do not even bother to run a credit report on the person applying for the loan.
Bad Credit History is Not Important
The hard money lender looks only to the property for sufficient collateral to cover the loan. Because of this, hard money loans are rarely higher than 60% loan-to-value. This means that if a property appraises at “fast-sale” prices to be worth $100,000, the maximum the hard money lender will advance would be 60% of the value, or $60,000, and that loan must be in first position.
Hard Money Works For Special Situations
Hard money loans are opportunistic loans. When the math is good, they typically close fast. These loans are not cheap. In fact, they are the most costly real estate financing available. They usually have interest rates in the double-digits. They may also have points paid at the closing of the loan and loan fees paid on top of that. Points are a percentage of the total loan deducted as a fee at closing.
Here is an example of a hard money loan situation:
A developer locates a property that is selling below market value. The price is low because the owner of the property is highly motivated to sell it. Perhaps this is because a foreclosure is eminent, or for some other reason, the current owner is desperate for cash.
The buyer offers to buy the property, which is worth on the open market $200,000 for a cash payment of $100,000 and close in one week. The buyer has $40,000 cash for the deal and gets the remaining $60,000 from a hard money lender. The property is acquired, re-modeled efficiently, and sells for $180,000 within six month.
In this case, there is plenty of money to pay the hard money lender at the rate of 15% for one year and 3 points. Additionally, there is profit for the buyer of the property who finds the opportunity. This deal is not possible unless the buyer acts accordingly when the value is there and the hard money lender is available to step up with the cash to close the transaction FAST!
The Advantages of Hard Money Lending
In hard money lending, the best advantages come from speed in closing a transaction. For the buyer who has sufficient cash to contribute to the transaction, they know a good opportunity when they see it. For the hard money investor, they get a great return and, if all else fails; they foreclose on the property and get the property at a great discount. Some hard money lenders actually hope the project fails to pay the loan, so that they get to “steal” the property at a bargain.
Summary
Hard money loans are extremely useful in real estate transactions that have a built-in profit potential. Hard money lenders know this and are experts at determining what value exists in a property. Even if the worst-case scenario occurs and they must foreclose on the property to regain their investment, the hard money lender usually makes a profit.
References
Hard Money Loan
https://en.wikipedia.org/wiki/Hard_money_loan
10 Questions on Hard Money Loans
http://www.biggerpockets.com/renewsblog/2008/02/21/10-questions-on-hard-money-loans/
Hard Money Basics
http://banking.about.com/od/hardmoney/a/hardmoney.htm
HARD MONEY LENDING FAQ
http://www.arixacapital.com/investor-resources/hard-money-lending-faq/