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Real truth about hard money loans

David Hansel, president, Alpha Funding Solutions

Hard Money sounds like a dirty word, but is it?

Cold cash plays a vital role in the real estate investment community and brings benefits not just to investors but the local economy.

Private lenders fill a void from the banks by providing fast, flexible access to short term capital based on the merits of a deal, exit strategy and borrowers experience.
Currently, fix and flip projects are all the rage and many of these groups turn to hard money lenders to back them.

They may pay a premium to secure the financing, but it enables them to be a cash buyer and get needed construction dollars with maximum leverage. In turn these groups are improving distressed homes or properties while putting people to work in effort to complete the renovations.

In the end the investor makes money, they create jobs and also help to improve towns and neighborhoods.

Hard money sounds difficult to get, but it doesn’t have to be.

Oddly enough getting hard money typically is one of the easiest loans to obtain. The basics are that you have to have good collateral and demonstrate the ability to repay the loan within the term.

“Hard” actually refers to the terms which these lenders offer which usually comes with a one year term and 12% to 15% interest only rate and 2 to 5 origination points.

Since the loans are short term in nature, the total cost of the capital many times is not much more then 10% to 15%. This expense is many times offset by the discount a buyer/borrower gets by having the ability to offer a seller cash and a quick closing in as little as a week to two weeks.

The other real benefit is that hard money lenders can be flexible and overlook certain issues that banks cannot. Banks have many regulatory constraints that could make funding a loan impossible or if it can be done may take 30 to 60 days or more to obtain.

With a hard money lender you can avoid these issues and this can make all the difference for whether or not real estate investor makes money or not.

Who needs hard money and what do you have to do to get it? Essentially it is a bridge loan, so from fix & flip, fix & hold, to debt restructuring & ground up construction, it could be a good option, especially when time is not on your side to close,or you have less then stellar credit.

Lenders will look at three important factors when making a loan decision.

One – Collateral: What is our underlying collateral for the transaction, how marketable is it, and is likely to sell or be refinanced during our loan term.

Two – Experience and Capacity: Does the borrower have ability to handle the project, repayment of the debt and a viable exit strategy to pay us off on or before the maturity date.

Three – Credit: Lenders take a holistic view of a borrower’s credit history when making a decision, not just their score. If there is solid collateral and capacity, we can live with a less stellar credit profile, especially with a viable story or reason for the problem.

Every lender is slightly different and requirements can vary, but there are some basics of what you need to get a loan.

Create a biography about yourself, detailing your experience or reason for why you want the loan; Draft a personal financial statement; Note your credit score; Document details about the property, including comps or an appraisal.

You should create a detailed budget if work needs to be completed and provide an overview of your exit strategy.

Highlight the number for the loan including purchase price, construction dollars, available money to put down and after-repair value.

There may be other items required, but an active lender should be able to make a commitment based of these details right away.

As you read through, one might think that asset-based lenders are cowboys and acting as loan sharks, but it is far from the truth.

Lenders and borrowers have as symbiotic relationship. In our company we have built many long-term relationships with repeat borrowers who will do anywhere from 2 to 12 loans a year.

Lenders get to make a nice return while providing a valuable resource to the borrowers.

In turn borrowers have the ability to make money through real estate investments or in some cases restructure a loan that otherwise could not be done by a bank.

So the next time you or a borrower of yours comes across a real estate opportunity but finds themself short on money or time, they should consider looking for a seasoned and reputable private lender.

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