foreclosure properties

WHO ARE YOU GOING TO CALL? WHY A HARD MONEY LENDER MIGHT BE YOURFIRST STOP

It isn't uncommon to hear mortgage industry insiders refer tohard money lenders as a last resort. While this may be true tothe extent that many borrowers who solicit loans from hard moneylenders do so as a last resort, there are many cases in which ahard money lender may be sought before a traditional bankinginstitution. Let's take a look at some scenarios where a hardmoney lender might be a first stop instead of a last resort.

COMMERCIAL REAL ESTATE DEVELOPMENT Let's say a real estatedeveloper has sunk $10 million into a development deal andoriginally planned to sell units in January and would then beginto recoup their investments dollars from the project. As is thecase with many such endeavors, delays may push back thebeginning sales date or the project may go over budget, leavingthe developer with a cash negative situation. The developer nowmust take out a bridge loan in order to get through his cashpoor period in order to "survive" until the project begins torealize a cash positive position. With a traditional loan, thebank would not push through the loan for the borrower for fourto six weeks. The developer would default on his original loanor would not have cash on hand to finish up the project. Thedeveloper needs cash right now and oftentimes needs the cash foronly a two to four month period. In this scenario, a hard moneylender would be the perfect partner because they can provide aloan quickly and efficiently.

FLIPPING PROPERTIES Another group who may use hard money lendersas a starting point as opposed to a last resort are real estateinvestors looking to "flip properties." If an investor locates aproperty that they deem to be a great value, they might needquick and secure financing to take buy, renovate and sell theproperty quickly. Anyone looking to flip real estate does notwant to hold on to the property for a long period and the shortterm loan from a hard money lender will accommodate this need.The loan may also be structured as interest only, keeping theexpenses low. Once the property is sold by the individual who isflipping the property, the principal is paid back and the profitis kept or reinvested into the next project.

A BORROWER IN One final scenario of hard moneyinvolves someone who finds themselves in foreclosure. Once ahomeowner falls behind on their house payments, most lenderswill not provide them with a loan or restructure their currentloan. Occasionally, an individual who is facing willobtain a hard money loan to avoid proceedings anduse the time to sell the property.

The question remains why would hard money lenders loan money ifa traditional bank wouldn't even consider such a gamble. Theanswer is two fold. The first is that hard money lenders chargehigher rates than traditional lending institutions. The secondis that hard money lenders require the borrower to have at least25-30% equity in real estate as collateral. This insures that ifthe borrower defaults on their loan that the lender can stillrecoup their initial investment.

A hard money loan is essentially a marriage between a borrowerin a tough spot (either from a time sensitive perspective or dueto their poor financials) and a lender who is risk adverse andis willing to take a chance for a higher return. While hardmoney loans may be a last resort for many, there are plenty ofscenarios when hard money is the only way to go.