With commercial mortgage lending options bursting at the seams because of U.S. government-injected funds, corporate giveaways and hedge funds clamoring for capital returns, you may think there isn’t much need for hard money lenders. But you’d be wrong.
Despite all the competition, hard money can still be music to the ears of commercial mortgage brokers and their clients. Experienced private lenders help brokers and borrowers to protect themselves, earn strong returns on investments and provide products that people are looking for. These loans aren’t for everyone, but for a broker working with a sponsor who has a credit score below 700, has gone through bankruptcy or has even been to jail, there are lenders that can help.
Saving the day
The niche of hard money lending is designed to provide a short-term loan at a higher rate of interest to a borrower with a project that may not be bankable for any number of reasons. Many of these borrowers have the goal of getting back to conventional loans and hard money lenders encourage this process.
These private lenders build their businesses by helping true entrepreneurs — the businesspeople who are not afraid to take risks. And the reasons why people need hard money loans are as varied as the people themselves.
Take, for example, a top California developer with more land-deal experience than just about anyone. But he had struggled through the housing crisis of the late 2000s and, as a result, had tax and credit problems. He had a property under option to purchase for two years but was unable to obtain financing. Many financial institutions had rejected his loan request for multiple reasons.
By the time he found a hard money lender, the developer’s contract for the property was expiring in two days. Within 24 hours, however, the lender had investigated the property, the borrower and the deal. The lender agreed to a $1 million loan secured by the property. The interest rate was 18% — much higher than the usual bank rate.
Such fees are part of the cost-benefit analysis all borrowers need to think through when deciding whether or not to use a hard money loan. The rates can be substantially higher than the typical bank or traditional lending institution. Hard money lenders, however, move much faster than the usual bank. It’s not unheard of for a hard money lender to complete a deal in a few days, while banks may take weeks or months to approve a loan and complete the necessary paperwork.
The California developer’s hard money deal was solidified before his purchase option ran out. Less than a month later, the developer resold the property for $2 million, making a profit of about $1 million. The lender ended up having a long-term business relationship with the developer, repeatedly loaning him money to complete various deals that resulted in healthy returns for both parties. The developer is now able to take out loans from a bank.
Speed and convenience
Many borrowers approach a hard money lender because they are stuck in a financial Catch-22. Another example is the owner of a 50% occupied townhouse project in Atlanta. The owner needed to make repairs so he could rent out the other half.
It was a gold mine property in a great area and the landlord believed the asset would triple in value after it was repaired. But no bank would loan him the necessary capital for repairs simply because the project was only half full. Instead, he borrowed the funds from a hard money lender, repaired the property and then was able to obtain a bank loan.
Then there are people such as the well-heeled entrepreneur who borrowed from a hard money lender to invest in a startup tech company because bank loans took too long; the homebuilder with income restrictions who had empty lots and needed a loan to build houses; or the businessman who was facing litigation and needed money fast. The bottom line? Hard money is still here and it’s here to stay.
The beauty of hard money is that it’s easy. Some lenders rarely ask for appraisals. Borrowers are not always required to provide credit reports, tax returns or proof of employment. Lenders may not require major documentation concerning such factors as rents, lease agreements, or zoning and engineering reports.
Hard money lenders may not care if a borrower has questionable or even illegal issues in their past. The advantage is that these loans can be closed fast, the mortgage broker gets paid and the borrower moves on with a funded deal.
This type of loan does come with risks. Luckily, however, many of these risks can be mitigated through due diligence, title insurance and a competent attorney.
Lenders are sometimes fooled by borrowers who do not own the subject properties or the companies they use as collateral for a loan. One hard money lender, for instance, made a deal that was secured by a prestigious coffee plantation in Hawaii.
The plantation — located on a hill overlooking the Pacific Ocean — grew, roasted and packaged the highly coveted Kona coffee beans. After the loan closed, it was alleged that the person signing on behalf of the company did not have legal authority. The matter was ultimately resolved through litigation and the lender was paid in full, including late fees and default interest. Title insurance is there for a reason because it covers these oversights.
When it comes to hard money, there are borrowers who have wound up in jail and lenders that have had to foreclose on projects to get their money back. Lenders also may deal with a borrower’s business partner who ultimately broke up the business and sold the real estate because the two parties couldn’t get along.
Additionally, the hard money lending industry has its share of bad actors who have been known to charge onerous hidden exit fees, prepayment penalties, inaccurate payoffs and extravagant late fees. These lenders have led to the hard money sector gaining a questionable reputation in some circles of commercial real estate finance.
● ● ●
Hard money is not for everyone, for sure, but it fills a market demand and can be quite useful to real estate investors and mortgage brokers. Anytime you have a client who is unable to borrow from a bank, you should call a hard money lender.
If a broker or a lender has given up on a loan request and the borrower is ready to call it quits — even if they have ample equity — you should contact a hard money lender. If hard money won’t close the deal, then it shouldn’t be done. ●