The Great Recession and various financial crises that have taken place in the intervening years have had strong ripple effects on credit markets nationwide. Many people who were negatively affected by the housing crisis and other economic woes ended up with damaged credit records and scores. At the same time, a large number of these individuals owned significant amounts of real property that needed ongoing financing in order to promote continued viability.
The juxtaposition of these and other factors created a market of landowners and developers who, though viable financially, were unable to secure loans from mainstream lenders like large banks. This, in turn, encouraged the rapid growth of what is colloquially known as the hard money market.
While they present real risks to investors and borrowers alike, hard money loans do serve valuable purposes in the new economy. The hazards inherent in hard money deals are also accompanied by possible rewards for investors who can successfully locate loan opportunities with high rates of return.
Hard Money: What is It?
Hard money loans are part and parcel of the informal credit market. Unlike the formal credit markets that are inhabited by large mainstream lending institutions like banks, informal lenders focus their collective efforts on people and companies that have cannot obtain loans from mainstream lenders.
As such, hard money brokers often deal with individuals and business entities that may have less than perfect credit records. In order to serve this market, lenders rarely run credit checks on their hard money loan applicants. Rather, these loans are usually backed up by collateral. Given the size of many hard money offerings, brokers and their backers often deal with borrowers who can secure their loans with real property.
In addition to their collateral requirements, hard money brokers usually charge their loan recipients higher than market interest rates that may reach 25-percent.
Hard cash brokers may accept personal or commercial property as collateral for their loans. In the case of personal property with mortgages attached, lenders prefer to deal with customers who own properties that have low loan-to-value ratios. By doing this, they make it easier to recoup funds from defaulted hard money loans.
Hard money loans thus offer clear opportunities for investors who are willing to do a little homework. Part of this research often involves searches for reliable and experienced hard money brokers.
Who are Hard Money Brokers?
Hard money brokers are individuals who receive loan brokerage permits or licenses from state or national governmental institutions. In many jurisdictions, hard money brokers are also real estate brokers who provide loans to individuals and businesses.
Depending on its size, each state may have hundreds of licensed brokers on their rolls. Given the abundance of such professionals, it is natural that some of them may operate unprofessionally. By the same token, the majority of such brokers, while often offering tough terms, deal fairly with their clients.
For investors who wish to break into the hard money lending arena, real estate brokers and their organizations are good places to begin their searches.
Who can Lend Hard Money?
In order for large institutional lenders like banks to legally make loans, they must comply with many regulations. In contrast, investors who operate in the informal credit market face few barriers to entry.
Many hard money investors form corporations that may include any number of people. These legal entities can help to protect business owners from most liability issues. They may also need to conform with the lending regulations in force in their areas of operation. For example, many jurisdictions limit the amounts of interest that loan brokers can charge their customers.
Other than these and a few other minor setup procedures, many people who wish to earn better than average returns on their investments work with hard money brokers to reach their goals.
What Should Lenders be Aware of?
While hard money markets can provide good returns, they can also be sources of financial danger. In order to avoid tragic capital losses, investors should stay aware of possible dangers and trends in the informal credit markets.
Most hard money loans are short-term loans taken out by individuals with real property to use as collateral. In the past, inexperienced hard cash investors have used brokers who failed to examine collateral properties before closing loans. Such unexamined properties have sometimes proven to be unusable, and have thus cost investors dearly.
While such episodes may be rare, it pays for would-be investors to carefully investigate any potential projects and also the brokers that supervise them. By doing so, hard money lenders can protect their investments and help to ensure healthy returns.