Top 10 Myths about Hard Money Loans
1. Hard Money is too expensive
While Hard Money loans do cost more than bank financing, on many deals traditional bank financing is just not an option. If you have a property that you need to act quickly on, a discounted payoff, partner buyout, then paying hard money rates as a bridge to traditional financing is not too expensive. Remember, you’re paying for speed and financing on properties that banks just don’t lend on.
2. Hard Money is only for people with bad credit
NOT TRUE! Once again, there are many properties, especially those in need of rehab, or those that are not stabilized yet to where it is cash flowing and the property can support the debt, that banks just won’t touch. Does this mean that only bad credit borrowers buy these properties? Of course not!! How about that property that you get under contract and needs to close and fund in 7-14 days? Do you think your bank can make that happen? I don’t think so.
3. Only desperate borrowers with not enough money use hard money loans
I look at this as “only borrowers that understand the market use hard money to their advantage!” Most investors I know that are successful never pay cash. They use the power of leverage to get more deals done rather than tie their money up in one or a few deals. Why do 1,2,3, when you can do 4,5,6 at a time?
4. Hard money lenders want your property
NO we do not want your property. A true Hard Money lender lends his money for a guaranteed rate of return over a certain period of time, securing that loan with a 1st position lien on a property. I’m in NJ, do you really think if I make a loan in let’s say North Carolina, I want the borrower to not pay me, so I have to foreclose, then go down there, hire an attorney, incur more costs, figure out what needs to be done, finish the property myself, and then have to market and resell to recoup my funds? While at the same time that money is not earning interest?
5. Hard money borrowers have no other options
False. Many Hard Money borrowers have good credit and assets, but they turn to Hard Money Loans for several reasons: a) speed of closing, b) property type, c) property condition, just to name a few.
6. Hard money lenders are loan sharks
False! Many Hard Money Lenders, especially a lot of local Private Money Lenders, are successful businessmen looking for a better rate of return than they are currently getting on their investments elsewhere. Or the more sophisticated lenders tapping into their home equity, borrowing money sub 2.5% and lending it out at 12-13% and getting paid 10% to live in their home.
Hard Money Lenders charge the rates/points they do because they will overlook some things that banks won’t, they will fund properties that are not bankable, and if you have a deadline approaching quickly, most will push your loan along to ensure you meet that closing date.
8. All hard money loans are no-doc loans
Maybe about 15 years ago this was the case. While there are still some locals that will meet you at the property, shake your hand, tell you how much he will lend on it, and have his attorney and your attorney hammer out the closing, this is not the norm these days. Most hard money lenders lend on properties not only in their own backyard, but many will lend outside their area. This leads us to one of the most important pieces of a loan – the appraisal. For rehabs this is especially important as the lender is lending on a future value of the asset. Next is the title report. All lenders will require a clean title at the time of funding as well as a lenders policy and title insurance. The rehab budget for the property, how else will the lender know what your plans for the property are? Your ID – driver’s license, passport – we need to make sure you are who you say you are. Bank statements, while many lenders do not look at these, the ones that want to know the probability of the borrower being able to afford to pay you do. Tax returns – how then will the lender know if the borrower makes enough money to debt service (especially on a property that is not cash flowing?).
9. It doesn’t matter what your exit strategy is
False! It’s not always about the numbers or the spread in the deal. How are you paying me back in full at the end of the loan term? Do you have a plan? If your credit is 525 and your exit is to get a bank loan, that is probably not happening and a lender will not think that is a valid exit. If your exit is to sell, but you are buying in areas that are “investor areas” who are you selling to? Make sure you have a valid exit strategy when presenting your loan on day 1.
10. Hard money lenders lend 100% so you don’t need any money as an “investor”
Ahh, my favorite. “Well I have a property that needs rehab, and the purchase and the rehab are under 65% ARV so can you lend me all the money”. While some “Private lenders” fund like this, hard money lenders that do are not out there. Why would a lender want to take all the risk? We can just go out and buy properties ourselves with less risk, as we know the borrower at that point very well. The only place that 100% funding exists is in many of these “guru” courses or when you talk with some conventional mortgage brokers that don’t really understand how hard money works.