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by: Stephen Cook
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." 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.
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