What are the Advantages of Hard Money Lenders?
When looking to get involved in real estate, many would-be investors believe the traditional path is the best (or only) option. They pack up their financial documents, head down to a local bank, sit with the loan officer for hours on end, wait 2-3 months for a letter, and then finally receive their money if they are approved.
Ask anyone who’s been there: that wait can be horrific.
Not only are you saddled by the crushing weight of wondering whether or not the bank will decide to take a risk on you, but that perfect investment opportunity that you saw weeks ago has already been snatched up by someone else, leaving you with a massive loan and nothing to spend it on.
A terrible thought indeed.
The savvy investor will begin to investigate alternative means of securing funding for their properties, one of those being a private, or hard money, loan. For those unfamiliar with the term, hard money loans are simply privatized loans that are secured using real estate as capital. While the rates are generally higher than traditional loans, they offer numerous advantages.
1. The Ability to Secure Funding Quickly
As mentioned above, traditional loans can take ages to secure, leaving you helpless to pounce on any opportunities you may encounter. Conversely, hard money loans can be secured quickly, usually within one to two days, and sometimes even on the same day. By law, owner-occupied hard money loans can sometimes take 2-3 weeks to clear, but that’s still lightyears of traditional loans.
The process for hard money loans is much more streamlined than traditional loans. The lender will examine the value of the investment property, determine the value of the property put up for collateral, investigate the borrower’s ability to complete the job, and then ask about the borrower’s ability to make payments. If all of these are satisfactory, the loan can be completed and the borrower is on their way. No fuss, no hassle, just money changing hands from lender to borrower.
2. The Ability to Secure Funding Easily
Banks are known for two things: having a long list of requirements that a potential borrower must meet to secure a loan and saying “no” a lot more than they say “yes.” Not only can the process of securing a traditional loan be frustrating, but it can also be a gigantic waste of time if they end up denying your application.
Hard money lenders aren’t concerned with any of the paperwork that goes along with traditional loans, making them perfect for people that have foreclosures or unpaid debts to their name. Moreover, people who are non-citizens but want to start their own investment property business may be denied because of their lack of a credit history at all.
Other groups that would be denied a traditional loan are people that are self-employed or people with less than two years of employment history at their current job. Banks tend to deem those people as “unlikely” to have the resources to pay back the loan and are flagged for being high-risk. Even investors that have a perfect track record of making payments but simply have too many mortgages on their record are usually denied as well. The criteria that banks use to flag people for loan denials are strict and usually arbitrary.
3. The Ability to Secure Funding At All
Banks are notoriously risk-adverse and anything that is wrong with the borrower or the property itself is usually cause for a loan denial. If the bank feels like the investment property is uninhabitable or dilapidated, they might reject the loan no matter how skilled or experienced the borrower is.
The life of a loan can also give the bank pause. Financial institutions love to make long-term loans that accrue smaller interest over time rather than short-term loans that have high-interest rates and are risky investments. For the borrower who is only needed a short-term loan to fix and flip a property, a long-term loan doesn’t make any sense. Also, in the event of problems during the renovation that may cause the project to get held back, the borrower may only need a short-term solution – akin to bridge loans – that can help the borrower for a few months.
Hard money lenders, many of whom are real estate investors themselves, are more open to unorthodox investment properties and are also more empathetic to various opportunities. They investigate each project individually and can approve or deny based on a variety of factors, not all of them having to do with making money off the interest of a loan. Banks don’t have the flexibility that hard money lenders do, nor do they have the vision required by many lenders to see the full vision for a project, making them perfect for people working in real estate.