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Private or "hard money" lenders are private
individuals with surplus money available for investment. Some have deep
pockets while some have limited resources. Based upon their own personal
criteria, they lend this surplus money, primarily on a short-term basis, to
real estate investors who use it for a variety of profitable purposes
including buying and repairing distressed properties.
Why is it called "Hard Money"?
Don't be confused by the term "hard money." It doesn't mean that this money
is difficult to find or obtain. Actually, it is some of the easiest money to
procure. So why is it called "hard" money, you ask? Good question. In the
world of finance, money is either "hard" or "soft."
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Hard money has stricter terms and a clearly defined
repayment schedule. Softer money has easier terms and a more flexible
repayment schedule (e.g., debt service subject to available cash flow). In
the case of private financing, the terms for hard money loans are
exceptionally harsh with very low loan to values (LTV's), higher than market
interest rates, and a lot of upfront points.
Typical Terms for Hard Money Loans
Terms for these types of loans will vary from lender
to lender and will depend upon the experience level of an investor as well
as the length of an investor's relationship with a particular lender.
Generally, a hard money lender will provide a loan for 50-75% of the
after-repaired value of a home at an interest rate of 12-18% for a period of
6 months to five years. They will also charge between 2-10 points as an
upfront financing fee.
As you invest, you will discover that these terms will vary from lender to
lender. Some will only charge interest while some will amortize their loans.
Some will lend repair money; others won't. Some will place the repair money
in escrow to be drawn out as the work is completed; others will let you
leave the settlement table with it. Some will lend closing costs; some
won't. Ultimately, when finding hard money lenders, you will need to
determine their terms and how they might fit into your plans as a
wholesaler.
Lending Criteria for Hard Money Lenders
Like terms, lending criteria also varies from lender
to lender. Each has their own preferences with regard to areas in which they
will and will not lend and types of investors to whom they will and will not
lend. Some will check your credit, some will not. Some will do their own
appraisals, some will not. Some will charge for an appraisal, others won't.
Some will charge an inspection fee for each draw from the repair escrow,
others won't. Some will only lend in certain areas while others will lend
everywhere.
Some are more numbers-driven when it comes to decision-making while others
go more on their feelings about you and/or the neighborhood. What about my
credit? With terms so favorable to the lender, most hard money providers are
concerned primarily with the value of the property, placing less emphasis,
if any, on the credit of the payor. They just want to know that in the event
the payor defaults they will possess an asset from which they can extract
their original investment and possibly more. However, this is not to say
that lenders desire to go through the hassle and expense of taking back and
reselling a property but merely to point out that due to the terms of the
loan, private lenders are secured, and feel secure, whether a borrower pays
or not.
Hard Money Lenders Are People, Too
You must keep in mind that most hard money lenders are
private individuals. They are not institutional investors who have a set
standard of guidelines dictated by the federal reserves. They can be
flexible, they can be tough. They are people just like you and I. You can
talk to them. You can befriend them. You can laugh and joke with them. They
can be your neighbor, your doctor, your attorney, or your bus driver. They
usually don't advertise that they lend money, but instead are found through
word of mouth.
A Great Resource
Hard money lenders are a great resource for real
estate investors, particularly a beginner with limited resources (e.g. cash
and credit). Having a hard money lender on your team enables you to
confidently make offers on properties. It enables you to purchase properties
when your offers get accepted, and it provides you with the funds necessary
to do the repairs if needed. In fact, I have heard of some cases where
individuals have even been able to borrow holding costs, but I have never
met any lenders myself who will actually do this.
