Knowing what happens at the end of a hard money loan isn't the primary concern for most borrowers. Repayment is a long way off and there's a lot of work to be done before you cross that bridge. But knowing what happens at the end of your loan is a crucial component of your strategy. The Hard Money Co. needs our borrowers to have a clear understanding of what their exit will look like because ultimately, that's what will determine the success or failure of their investment.
With a standard loan term of 6 months, the end of your loan comes sooner than you anticipate. Your strategy should clearly outline your exit strategy including how you're going to pay off your financing obligations. With thousands of completed loans under our belts, we've seen every possible scenario play out. Here are a few of the most common occurrences of what happens at the end of a hard money loan.
The Property is Sold and the Loan is Paid Back in Full.
The best case scenario for the investor and The Hard Money Co. is a successful renovation and sale of the investment property. Here, the investor executes their strategy to perfection. Using hard money, they are able to acquire a distressed asset and leverage our capital and repair funding to perform a complete renovation of the property. All the while they are paying interest-only payments on their loan. At the end of their renovation, they sell the property to new homeowners. This transaction nets them a profit relative to their purchase price, closing fees, repair budget, and carrying costs. They are able to make the final balloon payment on their loan and pocket the difference in pure profit.
This is the ideal real estate investment strategy and has made a lot of investors a lot of money. Our best borrowers bring us deals with this process in mind and the results speak for themselves.
The Borrower Refinances to Pay Off The Hard Money Loan
Hard money loans are high-interest, short-term loans intended to quickly acquire and flip distressed assets. When the initial 6-month loan term is nearing an end, borrowers often elect to refinance their properties to pay off the hard money loan. Typically, this is done for one of two reasons.
The first reason is that the borrower is executing the BRRRR Method. This acronym stands for Buy, Rehab, Rent, Refinance, and Repeat. If you are an investor who is trying to build a real estate portfolio while generating monthly cash flows, this may be the strategy for you. Our borrowers who use this strategy complete their renovations using our repair funding, rent the unit to tenants and seek to refinance through a traditional lending institution. The bank will pay off the hard money loan and the investor will now be responsible for a long-term mortgage at substantially lower interest rates. The net proceeds from the rent they charge and this mortgage payment will mean cash in their pocket every month, all while building equity in their portfolio.
Borrowers can also refinance without trying to use the BRRRR Method. Most banks will see the renovations performed on a property and issue a valuation that covers the hard money loan. With the property no longer being a distressed asset, the risk has been adequately removed from the property and they can offer a lower interest rate while the borrower finalizes their flip.
Both options are acceptable ways to exit a hard money loan, and we work with borrowers to ensure these transactions go as smoothly as possible.
The Borrower Extends Their Hard Money Loan
Sometimes, the 6-month term just isn't enough to complete their project. In these instances, borrowers simply extend their financing with The Hard Money Co. for an additional 6-month term. Though there are some extension fees, these are often substantially less costly than trying to sell or refinance an incomplete property. Most importantly, an extension can still result in a financially successful project. The fundamentals of the deal are still in place and an extra month or two is often plenty of time to complete the project.
Many of our most successful borrowers build in an extension in their initial strategy and ensure that there is room in the budget to cover those fees and carrying costs. They know that the standard term won't be a long enough time and account for that from the beginning. At the end of their extension, they will successfully exit using either a sale or refinance as we discussed above.
The Borrower Defaults On Their Loan
Defaulting on a loan should be avoided at all costs. It is costly for the investor and the lender alike and results in a lose/lose situation. Real estate deals can go south, but most investors realize this while it's happening and cut their losses. There's no shame in taking a hit and living to try again another day.
Some borrowers, though, can't see the writing on the wall and chase losses on bad investments. Eventually, they end up so far underwater that they can't get out of the loan.
This happens on a very small percentage of our deals because The Hard Money Co. does a great deal of work upfront to ensure your investment will be profitable. Our comparative market analysis, strategy reviews, and repair fund escrows, all provide investors with the best chance of success. In fact, we will not lend on a property unless we believe it will yield a profit for the investor. In situations that end in default, The Hard Money Co. has exhausted all options to get the borrower current on their payments and put them in a position to get out of their deal. When they can't, it's usually because they've given up and are looking for the easy way out.
If you pursue your investing career with a strong work ethic and proven investment strategies, we can guarantee that this won't happen to you.
Getting out of your hard money loan is the fun part. That means you've profited from your investment and are able to pay back your initial capital obligations. This frees investors to use those funds for additional investments or to reward their hard work by using the cash for other ends. Either way, getting out of your hard money loan is an accomplishment that should be celebrated.
The only way to get out of a hard money loan is to get into one, so fill out our loan application today to jumpstart your real estate investing career.