Hard Money Loans Are Not Just for People with Bad Credit.

I’ll bet you ‘d be surprised to know that the American national anthem, the Star Spangled Banner, is actually set to the tune of an English drinking song (“To Anacreon in Heaven“). Most people are also surprised to learn that hard money loans are not just for people with bad credit. Why would some with a good FICO score need to use an expensive hard money loan?

Surprisingly, the majority of hard money loans are not made to people with serious credit problems (although we do lend money to the credit challenged as well.) Savvy real estate investors and developers, for example, frequently use hard money and and make a ton of money despite the generally higher cost of these loans. Here are just a few reasons why.

When Cash Flow Isn’t Your Friend: Experienced real estate investors know that you make your money on the buy, meaning you need to buy a property for less than it is potentially worth, then raise it’s value to its potential. Often this means buying a property that has a low DSCR (debt service coverage ratio) or even negative cash flow. Conventional lenders have strict underwriting guidelines, so even if you’re buying the property for half its potential value the bank won’t lend you the money because the cash flow isn’t there now! We will lend you the money because we recognize the loan is backed by a property worth significantly more than you are buying it for. This fact, along with the equity the borrower is putting into the deal, makes it a safe loan in the private lender’s eyes. When the investor improves the property and it’s cash flowing nicely he can refinance with traditional lenders at a lower cost. As a California hard money lender this is a situation we see often.

Owner Occupied Properties: Many banks and mortgage lenders don’t like owner occupied commercial properties because they feel they’re taking a risk on the borrowers business as well as the real estate itself. This is faulty logic at best and the hard money lender corrects the error. If it’s a good property we can value it based on what it would rent for on the open market and lend up to 65% of that value. There is business risk associated with any commercial property and if the owner-occupier’s business doesn’t hold up the property can be rented to another business and do just fine.

The Need for Speed: Smart real estate investors also know that moving quickly is sometimes the biggest advantage in acquiring quality properties at below market prices. Traditional lenders can take 45to 90 days or more to close a loan; hardly a competitive advantage for the investor. As a hard money lender we can close loans in just a few weeks, sometimes in as little as a few days. The property can then be refinanced with a conventional lender over the next couple of months, but without the hard money lender the investor wouldn’t get the property at all.

Development Difficulties: Most banks assume that a builder who runs out of money is simply bad at managing a budget. Hard money lenders view it differently. In this era of rising material and labor costs and plunging housing prices many good builders find themselves in a financial bind. A hard money lender will look at the value of the project when it’s finished and provide the builder additional funds as needed to get there. Funds will be dispersed through inspection based draws. (The hard money lender will evaluate the builders however, to make sure they do know what they’re doing.)

These are just a few of the many reasons for using hard money. The bottom line is a good hard money lender can and will evaluate ever deal individually. If you’re looking for a special situation lender, hard money is the place to look.