What Is Hard Money?
Technically defined as “a conservative loan made against hard assets,” a “Hard Money” loan (or sometimes referred to as “Private Money” or “Special Circumstances Financing”) is a loan that is offered when a conventional loan may not fit the borrower’s lending needs. This generally happens when a borrower needs money in order to jump on a “hot” real estate deal and does not have time to wait for the stringent and sometimes lengthy underwriting process associated with a conventional loan. Hard money is offered by many different funding sources, from large private institutions to individuals seeking higher than average interest rate returns on their money. It can be offered in both residential and commercial real estate transactions, and the terms of these loans vary from deal to deal and lender to lender.
How Does Hard Money Work?
More details can be found in our FAQ Section, but generally the interest rate and the number of points will be significantly higher than with a conventional loan. Hard money lenders, although they do sometimes look at the borrower’s credit, oftentimes make lending decisions based primarily upon the equity position of the property. Let’s look at an example:
Suppose an investor bid at a foreclosure sale for a property valued at $200,000.00 and she was, in fact, the successful bidder at a price of $100,000.00. At first, the investor/bidder would be jumping up and down with joy, but may soon realize she has three problems: 1) her credit is “challenged” (another word for bad credit); 2) the foreclosing bank requires her to go to closing in three weeks, not enough time to get conventional financing; and 3) she has no cash over and above the initial deposit required by the auctioneer.
This is a perfect scenario for a hard money deal. Here are some other typical uses for hard money:
■Land Acquisition & Development
■Building Acquisition & Rehab
■Quick Propety “Take-downs”
■Low Loan-To-Value Loans
■Short-term “Flip” Properties
■Foreclosure or Bankruptcy Bailouts
■Self-employed or Cash-strapped Borrowers
■Any Short-Term Financing Related to Real Estate
In our auction example, the borrower would obtain a short term, high interest rate loan in exchange for quick access to funds from a hard money lender. Once the investor goes to closing, she can rehab and quickly sell the property at a huge profit and pay the hard money lender back.
But whether it’s an auction purchasae or any of the examples shown above, a smart hard money borrower always realizes that it is not the “cost” of the money that is important, but rather the “availability” and “timing” of the money. In essence, there is plenty of profit to go around and, by quickly closing on the deal, the parties have created a win/win transaction for themselves.