”Don’t wait. The time will never be just right.”
— Napoleon Hill:
Authored By: Andrew Goodwin
Hard money lenders are private lenders (individuals or companies) that offer short-term loans, which are secured on the quick-sale value of a property owned by the borrower.
The rate of interest on these loans is higher than rates charged by banks and this is because:
- The borrower’s financial condition is such that his loan application will be rejected by the bank, and
- The hard money lender takes a risk in advancing funds to a potentially risky borrower.
The interest rates on hard money loans can range between 10% and 18%, but defaulting borrowers can be charged higher rates. Some lenders require borrowers to make monthly interest payments while some defer interest payment to payoff day.
Interest rates and payment depends on the term of the loan, borrower’s risk profile, the value of the property and the current real estate market situation. For example, if there are many home foreclosures in the area, then the real estate market will be muted and the hard loan rate of interest will be higher because the lender will have to try very hard to sell the property in case of a default.
These charges and rates are understandable because the borrowers cannot get loans from conventional sources, which is why they opt for a hard loan. If you were to invest your hard-earned cash in a very risky venture, you would naturally expect high returns, wouldn’t you? Another reason why hard lenders charge a higher rate of interest is because consumer protection laws and expensive and time-consuming legal cases have pushed lenders into creating punitive terms.
Hard loans are usually given for between 3 and 12 months to tide over a situation or to grab an investment or profitable opportunity, but can also be given for up to 5 years depending on the situation. Longer loan terms are given at higher rates of interest. Hard loans are literally available “off the shelf” and can also help borrowers easily “bridge” over a tough situation.
How are hard loans structured?
Hard lenders structure loans based on the following criteria:
- The Loan-to-Value (LTV) percentage. The lenders estimate the market value of the property and advance a loan based on what could be realized if the property was sold within 1-6 months from the date of funding the deal. This value is referred to as the quick-sale value. Lenders typically advance up to 70% against the quick-sale value of the property. The quick-sale value of a property differs from a market appraisal, which does not take distress sale value into account.
- Type of borrower – lenders advance loans to businesses and individuals. Each borrower’s risk profile is assessed before the loan is given.
- Minimum loan size.
Hard Loans FAQ
1. Are hard loans evil as they are made out to be?
Well, no. The rate of interest on a hard loan is marginally higher than the interest rate on a credit card. So, if you are a responsible borrower, you have nothing to fear.
2. How long does it take to obtain a hard loan?
You can get one within 72 hours so long your papers are clear.
3. What are the hard loan costs?
You have to pay the property appraisal fees. You also have to pay for Title Policy and insurance.
4. Does the lender check my credit score?
Not necessarily. But he will check your credit to determine if you have been involved in bankruptcy, foreclosures, short sales, collections, etc. He will also check your repaying capabilities. More than anything else, he will turn a hawk’s eye on the property – because that is his collateral and the most important part of the deal. The lender will also ensure that you have enough resources to repay the loan and the interest.
When should I obtain a hard loan?
Hard money lenders are an absolutely indispensable resource for experienced real estate investors. If you ever spot a real estate opportunity that can make you money in the short-term, you must go right ahead and obtain a hard loan. For example, if you come across a house that’s available at a bargain, and you know that if you buy the house and hold it for a couple of months, you will make a tidy profit – then you must obtain a hard loan to finance your purchase.
Let’s suppose you are selling your home and its current market rate is $100,000. Now, you know that if you renovate your home, you will be able to sell it for $200,000. In such a situation, you must opt for a short-term hard loan. Your renovation work will be over soon and you can pocket most of the additional $100,000 in no time!
Businesses that are sitting on lucrative orders but cannot get bank finance also must look at hard loans. Hard loans will give the businesses much-needed working capital, which will in turn help the business execute the order, repay the loan on receipt of sale proceeds, and pocket the windfall.
Property flippers, who buy revenue-bearing properties and quickly sell these at a profit, are also helped by hard lenders. Buy-to-let investors, who buy bare properties, renovate them and let them out, can also opt for hard loans.
Do’s and Don’ts on a Hard Loan
A hard money loan comes with a higher rate of interest and it is available for a short duration. The loan fees are high as well. If you are obtaining a short-term hard loan than you must ensure that the loan fees are not high, else, your benefit/profit may be cannibalized by the high fees, interest, and prepayment charges, if any.
You must be absolutely certain that you have enough resources to repay the loan because you don’t want the lender to foreclose your home because of non-payment. Non-repayment of the loan can also result in a breach of contract lawsuit.
You also must check the lender’s credentials. You don’t want to borrow from a lender who has many complaints registered against him on the BBB. You also must talk to other borrowers to figure out if your lender runs a professional outfit. Some lenders want to receive interest for a specified number of months and such loans carry a prepayment penalty, which you must be careful of. You must shop around for the best rates before settling for a lender.
Finally, the biggest risk associated with hard money lending is the real estate market. If the real estate market crashes, hard money lenders will be left with many homes that have no takers. This will create a setback for the already tottering economy. Borrowers too can lose their homes if they do not repay the loans in a falling market.
Summing Up
To sum up, hard loans really help out the seasoned real estate investor. These loans help maintain the real estate market balance as well. Every buy-to-let landlord, business owner, real estate investor, and borrower in need of a bridge loan, must positively consider a hard loan. That said, you need to carefully plan and strategize your hard loan. You don’t want to be stuck with a high rate of interest and an unnecessary asset in these uncertain times. Also, before obtaining a hard loan you must first try to obtain finance from their banks and resort to hard funding only if you are unable to source conventional finance.
A little about me and my expertise – video
commercial / investment real estate / Arizona land specialist
https://www.youtube.com/watch?v=PPs3kpKR4nY
I go to great heights to sell or purchase your land
http://walter-unger.com/?p=10118
http://en.wikipedia.org/wiki/Timeline_of_Phoenix,_Arizona_history
3
Facts of Arizona – year 1848 to 2013
http://walter-unger.com/?p=9507
4.
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Investment Properties in Phoenix.
View my listings and my profile at:
http://www.loopnet.com/profile/14101172900/Walter-Unger-CCIM/Listings/
Please go to my web-site and get all the newsflashes and updates in Commercial Investment Real Estate in Phoenix and Commercial Investment Properties in Phoenix daily
Check out my professional profile and connect with me on LinkedIn.
Follow me on Facebook:
http://www.facebook.com/ungerccim
Follow me on Twitter:
https://twitter.com/Walterunger
Follow Me on Google+
https://plus.google.com/u/0/b/114560883588623379451/
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial Investment Real Estate Broker in Arizona now for 20 years and I worked with banks and their commercial REO properties for 3 years. I am also a commercial landspecialist in Phoenix and a Landspecialist in Arizona.
WHETHER YOU LEASE OR OWN
NOW IS THE TIME FOR YOU TO EXPAND, UPGRADE OR INVEST.
we are at on the a rise of the cycle in Commercial Real Estate. so there is only one way and it’s called we are going up and now is the time for you to expand, upgrade or invest in Commercial Properties in Phoenix. The prices on deals I may get you will not be around forever.
If you have any questions about Commercial Investment Properties in Phoenix or Commercial Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion in Commercial Properties in Phoenix or Commercial Properties in Arizona with you.Obviously I am also in this to make money, but it could be a win-win situation for all of us.
Please reply by e-mail walterunger@ccim.net or call me on my cell 520-975-5207 or Office:480-948-5554
Thank You
Walter
Walter Unger CCIM
Associate Broker, West USA Commercial Real Estate Advisers
7077 E. Marilyn Road, Bldg 4, Suite 130
Scottsdale, AZ 85254
Cell: 520-975-5207
Office : 480-948-5554
Fax: (480-658-1172
View my listings and my profile at:
http://www.loopnet.com/Profile/14101172900/Walter-Unger-CCIM/
a little about me and my expertise – video
commercial-investment real estate adviser-land specialist
https://www.youtube.com/watch?v=PPs3kpKR4nY
Delivering the New Standard of Excellence in Commercial Real Estate
- Commercial Real Estate Scottsdale
- Commercial Real Estate Phoenix
- Commercial Real Estate Arizona
- Commercial Investment Properties Phoenix
- Commercial Investment Properties Scottsdale
- Commercial Investment Properties Arizona
- Land Specialist Arizona
- Arizona Land Specialist
- Land Specialist Phoenix
- Phoenix Land Specialist
- Land For Sale Phoenix
- Land for sale Arizona
- Commercial Properties For Sale Phoenix
- Commercial Real Estate Sales Phoenix
- Commercial Properties Phoenix
- Commercial Properties Arizona
- Commercial Land Specialist Phoenix
- Commercial Land Phoenix
- Multifamily land Phoenix
- Retail Land Phoenix
- Industrial Land Phoenix
- Land Commercial Phoenix
- Land Retail Phoenix
- Land Industrial Phoenix
- Land Multifamily Phoenix
- Industrial Land for sale Phoenix
- Land Industrial
- P
- Investment Real Estate
Disclaimer of Liability
The information in this blog-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.