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What is a hard money lender?

What Is a Hard Money Lender?

Who do you imagine when people talk about a private hard money lender? Many people don’t have a good understanding of who hard money lenders are. Unfortunately, this kind of private investor is seen by many as a shady person who will break your legs if you don’t pay your debts in time. This image could not be further from the truth.

The Private Hard Money Lender

A hard money lender is a private investor or a group of investors who can offer a hard money loan. The main difference between them and banks is that they are not institutions. Their activities are less regulated, which enables them to create their own rules.

More and more people are entering the hard money lender market. Bloomberg recently reported that private credit is on the rise lately, and it is helping to fuel the current private equity boom. Private credit is now reported to be as big as $776 billion. While hard money lenders are not the bulk of those credit offerings, they are certainly an important part of them.

It’s important to understand who these investors are and what they can do for you. In fact, it’s important to understand what a hard money loan is. They are short-term loans that are generally used to buy properties. They are secured by the property that is being bought, and are considered safe investments. That is, if you are careful and only invest in property after you’ve done plenty of research.

People generally take hard money loans to “flip” houses. That means they buy a property with a low market value, renovate it, and sell it for profit. The idea is that you can buy the property quickly, fix it up, and turn a quick profit. The faster you do it, the more you’ll profit.
This activity is becoming pretty common. According to ATTOM Data Solutions, 2019 marked a 9-year high in home flipping.

Before you look for a hard money lender, you should know that they are not fit for all investments. They are most ideal if you can’t go to a bank or don’t have time for the process.

How Does The Hard Money Lender Benefit?

The hard money lender’s benefit comes from comparably high-interest rates. People who can’t, or don’t want to, use traditional lenders generally seek out hard money loans. This happens for several reasons, and they work as a second option, as well.

Loan fees can be around 5 percent, and the annual interest could easily be higher than 15 percent. Not many investments allow for these profit margins so quickly. Overall, this can be beneficial for both parties.

Another reason why people decide to become hard money lenders is that they can determine their conditions and guarantees. This gives them many advantages during the negotiation.

Lenders generally lend up to between 65% and 75% of the value of the property that they hold as collateral. But, some decide to take on more risk for the benefit of a higher interest rate. The higher the interest rate, the more profit the lender will achieve. The time frame to pay off these loans is often short. Most of them have to be paid in 12 to 24 months.

Keep in mind that fees and interest may vary a lot, though. This practice is not strictly regulated, so lenders can set prices and conditions as they wish. Do your research and tread with caution when looking for a hard money lender.

The criteria for approving loans may also vary from lender to lender. Most of the time, they don’t evaluate someone’s credit for approval. Their attention is most set on the asset that they are lending money on.

Finding The Right Hard Money Lender

If you need a loan, it is important to find the right hard money lender. You need someone that you can trust and preferably who will be near you.

You should look for a professional investor who has experience with hard money loans. Ask for referrals from previous clients or associates. Learn as much as you can about the lender’s past business practices. This will help you avoid fraudulent lenders and scammers.

You should also get to know the hard money lender before you sign any final paperwork. It’s also a great idea to ask an experienced attorney to look at the details of the contract before you sign it.

Remember that hard money loans are not without risk. If you are well-prepared, however, you’ll minimize unhappy surprises.

Sources

https://www.attomdata.com/news/market-trends/flipping/q1-2019-home-flipping-report/

https://www.bloomberg.com/news/articles/2019-09-22/how-private-credit-soared-to-fuel-private-equity-boom-quicktake

Becoming A Hard Money Lender

A hard money lender will never run out of fashion in spite of all the innovations in banking. Once in a while, people run into financial woes that their banks cannot sort as soon as they may need or their credit score does not just allow them to enjoy bank lending. When this happens, a hard money lender becomes the best option to work with.

Find a Borrower & Evaluate the Deal

You must have a way of reaching out to clients for your business. If you have enough money, go into advertising. If not, reach out to your investors and business people for leads on a deal you can fund. You have an upper hand if you belong to a local Real Investment Club. You can start pitching here. Talk to the club manager to allow you access to the members.

Size up the deal. Consider the money required and the collateral in question. Evaluate whether it makes financial sense to you.

Establish Equity

Once you have discussed the collateral, determine the borrower’s equity in the property. A hard money lender should be looking for at least 30% of the equity as a rule. So the borrower should not borrow more than 70% of the property value after repair.

Assume the purchase price of the property is $100,000.

$10,000 in repairs

$185,000 after repair value

So to give the borrower $100

Loan for $100,000 = LTV (loan to value) of 67%

Assess Borrower’s Credit

While you have been chosen because the customer does not want to deal with formal bank credit red tape, this does not stop you from checking the borrower’s moral standing. Check the reputation when it comes to making business deals. Have they ever been declared bankrupt? Is the first private lending deal? Do they make timely payments?

Remember you are interested in the borrower’s reputation. As for credit history, you do not have to worry, you have the property.

Negotiate

Ask the borrower about their expectations. Hard money loans take a short period between 6 months or a year. Some borrowers though may opt for multi-year loans such as 3 or 5 years. In this case, ask them to refinance or pay off your note prompt.

Interest rates will vary based on the risks, market rates, and duration of the loan. Be conversant with your local rates. Consider offering a small discount until you become an established hard money lender.

At this point, the borrower should have handed over the necessary documents. Understand why they chose you. Get a list of repairs needed alongside an inspection report including a termite and oil tank inspection.

Get a professional appraiser to do After Repair Value appraisal. Inspect the property to see the repairs for yourself. Ask for repair bids. The borrower must get a title and home insurance with your names.

Close the Deal

If this is your first transaction, use an experienced lawyer. Go through the loan documents and wire the hard cash to an escrow agent. Ensure that the terms are well stipulated and all exemption clauses are captured.

There are a number of ways that you can use to service the loan. You can either opt for a simple-interest loan only or hire a servicing agent if it is a complex loan. “Do a thorough research on the method that allows you maximum returns from the lending or the property.”

Secret Success Tips for A Hard Money Lender

Hard money lending business was innovated for convenience and faster access to cash. The protection of the lender is in the property offered as collateral. It is really important to ensure the documentation is clean, the title is valid and insurance is valid. To succeed in the business, you need these tips to ensure you take advantage of every good deal that comes your way.

– Liquidity

– Valuation of Collateral

– Borrowers Credit Valuation

– Proper documentation to ensure availability and authenticity of collateral such as insurance and private lender insurance

– Take Care of your Personal Wealth: do not put up everything up for borrowing.

Succeeding in this business is easy with good planning. Be careful about valuation and documentation. Ensure you stay liquid and do not jeopardize personal wealth while at it. If you need help on how to navigate the business, talk to us.

Source

Mckenna, Francine. How can you monitor a borrower without financial statements? https://review.chicagobooth.edu/magazine/summer-2014/how-can-you-monitor-a-borrower-without-financial-statements