If you're unfamiliar with hard money loans, the concept itself can be intimidating. Large amounts of money and the risk associated with real estate investment can give you pause when you're looking at financing options for your potential acquisition. Many people are left pondering a variety of very basic questions. Are hard money loans good? Are they safe for me and my investment? Are they even legal?
The answer to each of these questions is a resounding YES. But as is the case with any money-centric offering, you need to be educated on the product and its terms to ensure that you have a complete understanding of the consequences. This will help to protect you and find a strategy that you've chosen that is working to maximize your investment potential.
How Hard Money Loans Work:
Hard money loans are short-term loans typically used in real estate transactions. Their primary benefit is that they are able to be executed extremely quickly with minimal red tape as compared to a loan from a traditional financial institution. This allows investors to acquire their properties quickly before executing a fix & flip or a renovation & refinance. Hard money allows for the acquisition of property without putting large amounts of your own capital into a deal. This use of leverage can yield very profitable results for investors.
Hard money loans are almost exclusively provided by private lenders rather than traditional lenders such as banks. Unlike these institutions, private lenders aren't interested in conventional credit metrics to determine whether or not they will provide a loan. They operate as asset-based lenders who assume the first lien position on the asset. Rather than try to determine how likely a borrower is to pay, the hard money lender can simply use the value of the property to collateralize the loan. The metric they use to determine how much they are willing to lend is the After Repair Value (ARV) which is based on the fundamentals of the property (square footage, bedrooms, baths, etc.) and comparable properties in the immediate area.
Are Hard Money Loans Bad?
There is nothing inherently bad about hard money loans. In fact, many real estate investors, even ones that have significant net worth, use hard money loans to finance their projects. When people talk about the downside of the product, they are normally referring to these few drawbacks relative to conventional funding options.
Cost: Hard money loans typically come with higher than average interest rates, origination fees, and closing costs. This is the price that borrowers pay for the convenience and speed of the loan. Ultimately, the types of costs associated with the product are identical to other loan offerings. It's up to the individual investor to determine whether the math still allows for a profitable investment.
Shorter Terms: Whereas conventional loans often have terms that extend decades, hard money loan periods can be as short as 6-months. With monthly interest-only payments, this means that you will have a balloon payment of the principal amount due relatively soon. This is palatable for flips or renovate & refinance projects with fixed timelines. If a project runs into obstacles, however, you may face additional extension fees. Confidence in your timelines and ability to execute is essential in keeping your hard money project within scope.
The other factor in deciding whether hard money loans are good or bad is the trustworthiness and quality of the lender. As private lenders, hard money companies are under less scrutiny than traditional institutions. When deciding whether to work with a given company, pay attention to the level of professionalism the organization conveys. Are their terms clearly outlined? Do they have good reviews? Are they communicating with you throughout the process? Do you know who you're working with?
At The Hard Money Co. we strive to be as transparent and communicative as possible. We have a growing team of people dedicated to providing the best and most expedient borrower process to all of our customers. Whether it's your first investment or your hundredth, we will be by your side every step of the way.
Are Hard Money Loans Good?
For the majority of real estate investors, hard money loans are nothing more than another financing tool in their back pocket. When their project requires the use of that tool, hard money is objectively good. In other situations where another tool may be more apt for the job, hard money may not be the best choice. Typically, when people find fault with hard money loans, it's because they're using the incorrect financing instrument for their project, or are using it incorrectly.
For savvy investors, the benefits of using a hard money loan can be immense. When they fit the investment opportunity, they can open doors that are unavailable to investors who strictly use personal financing, traditional loan products, or money from family/friends. These are the benefits that investors value when pursuing hard money loans.
Faster Approval Process: From the moment you submit your loan application, The Hard Money Co. can have funds for you to close in as little as 7-10 days. This means that when an opportunity presents itself, you can get a jump start on competitors to close your deal. Additionally, you will receive a call from one of our loan originators within one business day and we can provide proof of funds immediately. This gives you the ability to hit the ground running from the moment you submit your application.
No Credit Check: Hard money loans are asset-based, which means lenders are not interested in the credit score of the borrower. If the property warrants investment, The Hard Money Co. will provide financing. Even for borrowers who have perfect credit, this is still a benefit. Credit checks take up valuable time and are unnecessary obstacles to acquiring your property.
No Appraisal: The Hard Money Co. understands that your project relies on dramatically increasing the value of the property after you purchase it, which is why we lend based on the After Repair Value (ARV) rather than an appraisal. This allows you to qualify for more financing than a traditional institution would lend, as they exclusively look at the current value. No appraisal saves time and allows you to fund your investment based on its potential.
Repair Funding: With the ARV in mind, The Hard Money Co. also offers a repair escrow that allows you to pay for the renovations and repairs as work is completed. The comprehensive nature of the loan means that your project will be fully funded through the end, allowing you to finish it and realize the profit of your efforts.
When your investment opportunity requires one or more of the aforementioned benefits, hard money should be considered. If you're on the edge about whether hard money would be best, filling out an application is a no-commitment way to get the ball rolling and see whether The Hard Money Co. is a good fit.
Are Hard Money Loans Safe?
A loan through The Hard Money Co. is 100% safe. We proactively communicate with our borrowers through the entire process and engage them with legal consultations and reputable title companies to ensure everything is by the book. We do everything in our power to ensure that a borrower's project is ultimately successful and profitable, even going so far as to reject loans that we don't view as being sound investments. The Hard Money Co. is only successful when our borrowers are, which is demonstrated by our outstanding reviews and an industry-leading percentage of repeat borrowers.
Are Hard Money Loans Legal?
Hard money loans are completely legal when funded by a reputable company such as The Hard Money Co. Typically, hard money loans fall under legal scrutiny when the lender fails to disclose costs associated with the loans or is otherwise dishonest about the terms. It also can become illegal if the lender provides funding while knowing that the investment is unlikely to be successful.
These are not concerns at The Hard Money Co.
The terms of our loans are clearly communicated across all of our channels and our loan calculator demonstrates exactly what you can expect to pay when you use The Hard Money Co. to finance your project. Furthermore, we exclusively lend to business entities which means that you are personally protected in the event of extenuating circumstances.
The Hard Money Co. is only profitable when our borrowers are. The company strives to go above and beyond to prove our value to everyone they do business with.