The majority of real estate deals in the United States involve some forms of financing. While it is often preferable to avoid debt, most people looking to buy homes simply don’t have the cash on hand to buy a decent house. For these buyers, the go-to solution for financing is a traditional mortgage.
Mortgages have been around for well over 100 years in the United States. Over that time, mortgage lenders, usually large corporate banks, have perfected the origination process. With well-tested and stringent lending standards, the long-term costs of mortgages can be kept relatively low because the lenders understand the risks and take steps to ensure that only qualified borrowers receive loans.
One flipside of this, however, is that many people are simply unable to qualify for a traditional mortgage. Many of those who currently do not meet the minimum threshold for a home mortgage may be best served by improving their credit, establishing a solid work history and even increasing their income.
But for some buyers, especially investors who add value to homes in order to quickly sell them. Another option may be better for meeting their goals.
Hard money is a great tool for certain real estate investors
Real estate investors who buy residential or commercial real estate in order to fix it up and then sell it for a profit often find it difficult to secure traditional financing. This is particularly true where there are serious defects with the property being bought. For a variety of reasons, traditional mortgage lenders often view these transactions as speculative and too risky to underwrite.
For these investors, hard money loans may provide a great option to get deals done. Hard money differs from traditional home financing in that it is usually issued by individual investors or small local groups of investors. Because there are no fixed underwriting rules, hard money loan deals can take on an almost infinite number of forms. In this way, hard money real estate loans are similar to how business acquisitions are financed. Each deal is unique, and both the borrower and lender have a great deal of latitude to structure the loan and the other terms of the arrangement.
This can allow borrowers to push deals through that would never otherwise be possible. And they can often do it with incredible speed.
Hard money loans are fast
One of the most attractive features of hard money loans is the speed with which they can be approved, allowing the borrower to get cash in hand. In fact, as far as closing timeframes, hard money loans are often equivalent to paying cash. This can be extremely important in hot real estate markets, where sellers are often hesitant to deal with anyone who can’t close within a few days. Prospective buyers who are using mortgage financing can tie a home up in a pending transaction for three months or more, with the risk that at the end of the process the applicant will be denied, and the deal will fall through.
With hard money purchasers, sellers can be guaranteed a fast closing date, giving the hard money buyer a huge negotiating edge.
Hard money is more expensive long term but much cheaper short term
Another big advantage of hard money financing is the enormous reduction in up-front costs. While hard money’s high interest rates make it inappropriate as a long-term financing solution, for short term applications, its extremely low out-of-pocket costs make it ideal for those wheeling and dealing in fast-moving markets.
On a typical $100,000 purchase, a mortgage-reliant buyer would need to pony up as much as $30,000 or more in cash to close the deal. That same buyer might only need to spend $5,000 on a typical hard money transaction. And because hard money loan terms are so flexible, the savviest investors are often able to structure zero-down deals, making it possible to buy multiple investment properties with no cash outlays.