To be a real estate investor, you need to have quick and easy access to capital. Real estate investing is a competitive filed. You don’t have time to procrastinate when a good deal comes on the market. However, conventional lenders fail to recognize that real estate investors – and especially those investors who buy and rehab dilapidated properties – have unique needs when it comes to the speed and the flexibility of financing. Waiting for the application to be scrutinized for 45 days is not an option when a cash buyer can snatch a property in a week or less. Hard money lenders fill the vacuum left by conventional lenders by providing real estate rehabbers with the funds they need – and on terms that make sense.
Hard money loans are offered by firms referred to as hard money lenders or private lenders. They are often privately-owned companies that lend their own money or money they raise from investors. Hard money loans are loans secured against real estate. In many ways, they are similar to a traditional mortgage loan that you might have on your home. A lender determines the loan amount you qualify for and charges the monthly interest on this amount until you repay it. Once you pay off your loan, the lien is removed from your title. However, this is where the similarities end.
Three key advantages hard money lenders have over conventional lenders:
1. Hard money lenders specialize in lending on distressed properties.
Conventional lenders such as banks and credit unions do not lend on properties in need of repair. This is why many distressed homes come with disclosures such as “Handyman Special” or “Sold Strictly As-Is.” These disclosures are codewords that the property would not qualify for regular financing.
Unlike conventional lenders that choose not to lend on distressed properties, hard money lenders specialize in them. They provide their borrowers with the maximum leverage by basing their loans on the forecasted after-repair value of the property as opposed to its current value.
The after-repair value (commonly abbreviated as ARV), is a potential sales price of the home once you complete your renovations. It’s determined by a licensed appraiser who compares it to other rehabbed properties in the neighborhood that are of the same size and style.
ARV-based lending offers borrowers an undisputed advantage. Since the after-repair value of your home is likely to be substantially higher than its current price, you can borrow more money from a hard money lender than from other financial institutions.
2. Hard money lenders offer significant underwriting flexibility.
Hard money loans are often referred to as collateral-based loans. They are focused primarily on your flip’s potential to make you money. “We never verify borrower’s income and don’t have minimum credit score requirements,” – says Kyle Sennott, the Managing Partner of New Funding Resources, a Maryland hard money lender, “We underwrite holistically. If we feel that our investor is well-positioned for making a profit, we will make the loan work.” Such flexibility is especially important for borrowers like real estate agents and construction contractors who might not declare their full income.
3. With a hard money loan, you can close as fast as any cash buyer.
Another reason where conventional lenders cannot compete with hard money lenders is the speed of closings. Sellers – and especially distressed sellers – prefer to close quickly and with no hassle. Cash rules but hard money loans offer the next best thing. Because of their simple underwriting criteria, hard money lenders can close your loan within a week or less, giving you the competitive edge you need.
Hard money lending offers unique financing mechanisms to both experienced and novice real estate investors. For someone with a modest level of savings, it can open doors to competing with the most affluent competitors. Well-heeled investors benefit from the incredible leverage that hard money offers: with private loans, they can expand their real estate investing business or pursue other business opportunities without depleting their own cash.