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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   September 2006

Make Hard Money Easy

These three factors might make all the difference in seeking a hard-money lender

Borrowers and brokers often ask, “With hundreds of places to secure hard money, does it really matter where I go?”

Hard-Money Lending: Myths Vs. Facts

Myth: Hard-money lending is a transaction of last resort on the part of the borrower.

Fact: Hard money is the first choice for some borrowers. A good hard-money lender will not loan against poor assets or to a poor risk. The loan simply must have a strategic value that will complete a sound transaction or business purpose. That way, it will justify the higher lending rate. In many cases, hard-money lending provides great opportunities for both the borrower and the lender.

Myth: Hard-money lending has expensive fees and penalties.

Fact: Not necessarily. Consider the overall loan rate and conditions. Compare the cost of the loan to the lost opportunity or the cost of an equity partner. Look for a lender that doesn’t disguise or excessively increase the true cost of borrowing.

Myth: The only clients using hard money are overextended or have poor credit.

Fact: Many hard-money clients use it as a financing tool rather than equity. They use it to pull the trigger on a time-sensitive transaction that would be lost with traditional banking sources. 

The answer is emphatically: Yes. Transactions in the commercial-lending environment come in different shapes and sizes. Some present more favorable conditions than others. Others come through people of varying levels of skills and experience. As we say, the difference is in the details.

When looking for a good hard-money lender, there are three important factors that brokers should consider: conditions relative to the loan, responsiveness and strength of relationships.

Loan conditions

For your borrowers’ sake, you should compare lenders with respect to upfront fees, loan to value, pricing, prepayment conditions and loan structure.

You might be amazed by some of the huge upfront fees that are tied up in some hard-money deals during the application process. While some firms seem to use these fees as a revenue stream, others will charge borrowers only for actual travel and directly related expenses. Borrowers need not pay lenders large retainers or high fees just to look at a deal.

A vigorous capital market functions best when hard-money lending serves its intended purpose — to create bridges for funding or measure its risk appetite. Loan structures vary greatly. If the conditions and structure don’t work for your borrowers, they should be able to get on with their business. And the lender can reapply its capital to the next deal.


Next, lenders should be evaluated by how quickly they can look at a deal, then by how fast and responsive they are at making and following through with a lending decision. Many commercial hard-money real estate transactions must, by their very nature, fall into place rapidly.

An example of this is when a desired property suddenly comes on the market. Competitors covet a strategic property. The purchase option has a shorter-than-normal time-frame. This kind of acquisition can set a larger deal into motion.

Sometimes, because of the perceived high risk, your long-standing banking relationship may not get you the deal. The bank may decide not to facilitate the transaction.

Instead, you will need to turn to lenders that will structure a flexible, multitiered hard-money lending facility. This is valuable in commercial real estate, where many deals are based on options or triggering events.

Ultimately, borrowers should not have to accept less-than-outstanding service throughout the transaction. Further, a quick “no” is much better than a languishing “maybe.” No matter what, they shouldn’t have to pay higher upfront fees or higher pricing for a quick lending decision.

A solid relationship

Compared to private-equity lenders, hard-money lenders are less likely to have as a deal point an equity stake in the underlying real property security or have an active role in its operation and management. However, the hard-money lender should understand a borrowers’ business, its basic goals and its competitive position. More specifically, it should demonstrate an excellent understanding of asset valuation, potential and exit strategy.

Look for a lender that will bring the prospective borrower on-site with it during the due-diligence process. The lender should discuss what it sees in the property and should be willing to support its conclusions. An inaccurate asset assessment is as bad as unreasonable or unsupportable terms.

•  •  •

By choosing the right lender, borrowers can foster long-term relationships that are grounded in open communication, prompt response, frank disclosure and mutual respect. This will bring about the repeat business and referral business desired by both lenders and facilitators.

Hard-money lending doesn’t have to be hard.



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