This article was submitted to be for publication and it answers the question of what a hard money lender is. All links in it are links to exclusive resources for our Real Estate Investor Bronze Members:
You may not have ever heard the phrase “hard money lender”, but you probably know what a Hard Money Lender is, even if you don’t realize it.
A Hard Money Lender typically offers consumers and businesses short term loans, using a piece of real estate as collateral for the loan. This is typically referred to as a “bridge loan”, a term you may be more familiar with.
Another thing that defines a hard money lender is the nature of their business. A hard money lender will require less documentation than a traditional lending institution. Since they require less documentation, the loan terms are harsher than the loans of a bank, with higher interest rates and less forgiving repayment terms. Rather than investigating the credit worthiness of the borrower, a hard money lender is more concerned with whether the loan is secured against an asset which has a value equal to or greater than the loan. What does this mean? Typically, a hard money lender’s borrowers will be at a higher rate than your average bank borrower.
Another type of hard money lender is known as the commercial hard money lender. A commercial hard money lender is less concerned with loaning money to an individual, and more concerned with offering money to a business interest. This might be a corporation, or it might be a businessperson who is trying to get financing for a business venture. Like a non-commercial hard money lender, the loan typically must be secured against an asset. However, in the case of the commercial hard money lender, this asset is often a piece of real estate investment property, or a commercial piece of property.
Hard money lenders operate in every state in which usury rules do not preclude their operation. Most states, with the exception of Tennessee and New Jersey, host many hard money lenders, and there are many companies that operate on a national scale.
There is a time and place for using hard money lenders. For more information read about the advantages of using hard money loans which covers strategies when it may be appropriate to use hard money.
Until my next post,
James
Every investor needs to be familiar with the different ways of financing real estate deals. The primary methods are traditional mortgages, hard money loans, private investor loans, partnership deals, owner financing and lease options.
Traditional mortgages are how most people get the money to buy investment real estate. However, with the recent tightening of standards to qualify for a loan, and Freddie Mac’s announcement that they have reduced the total number of loans an individual investor can hold, other financing strategies are important to have in your investor toolbox.
Hard money loans are typically short-term loans at relatively high interest rates. They typically come from people who are in the business of lending money. Most investors use these loans with a plan either to flip the property or to get new financing on it in the immediate future. Finding hard money lenders is a key strategy that we emphasize and consult with our Bronze Members about in our real estate investor consulting program.
Private investor loans usually have better terms and can be used long-term for an investment property. These lenders are not in the formal business of lending money and are usually individuals who are looking for a better return on their money than, for example, certificates of deposit can offer. This is another major area that we focus on with our real estate investor consulting clients because there has never been a better time to create win-win-win situations buying properties from motivated sellers with private lender funds.
Partnership deals are a great way to get around Freddie Mac’s new four loan limit. These types of deals can be structured in many ways, but basically, one partner finances the deal, often through a traditional mortgage, and the other partner manages the property on an ongoing basis. If you have already maxed out your four loan limit, but have the time and knowledge to find good deals, than this is a great way to increase your portfolio with a partner.
Owner financing is simply asking a seller to “carry back.” The seller acts like the bank and you pay the seller regular payments on the purchase price of the property. This is another good way to get around the Freddie Mac loan limit. In fact, we help our real estate investor consulting clients (Bronze Members) create specific marketing campaigns to target sellers that have a much higher probability of accepting owner financing and we help our clients learn how to negotiate great win-win owner financing deals that get accepted.
Lastly, lease options provide investors the opportunity to control property without getting any type of financing. The seller of the property would give you a lease–just like a rental agreement–for a specified period of time, and you would also get an option contract that gives you the right, but not the obligation, to buy the property anytime during the lease. In an uncertain market, this is a great way to stay active as an investor, but with limited risk, since you can always walk away at the end of the lease.
In conclusion, there are many ways to keep investing, despite tougher lending conditions. As investors, we must keep in mind all of our options when it comes to financing new deals.
Until my next post,
James
