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What Is Hard Money Lending?
by Dave Guilford
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Overview
What Is Hard Money Lending?
Hard money lending, also known as asset-based lending, is a facility common in real estate and construction characterized by short-term, high-interest loans and relaxed underwriting standards. Hard money lending is typically used by investors intending to buy a blighted property and rehabilitate it to increase its market value. Hard money lenders will often loan the investor the funds necessary to both purchase the property and to complete its rehabilitation. The creditworthiness of the investor is generally less important than the market value of the property, hence the term asset-based lending.
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Significance
Hard money lending fills an important gap in real estate lending. Without hard money lending, many properties would remain blighted and drag down the property values of their geographic areas. Often commercial banks are reluctant to lend money to investors with many real estate projects.
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Function
Hard money lending provides short term financing to investors who do not otherwise qualify for commercial lending. The typical term of a hard money loan is six to 12 months. The interest rate charged will often be more than double the current APR for a 30-year fixed rate mortgage, and the origination fees can amount to several percentage points of the overall loan amount. The terms of the loan may also limit the disbursal of funds based upon the accomplishment of certain benchmarks in the construction or rehabilitation project. These are known as draws. The investor is often given the money to purchase the property and complete the first third of the project. The hard money lender then evaluates the progress of the project and at that point releases another draw to fund the completion of the next third of the project. Hard money lenders are typically repaid when the investor completes the project and either sells or re-finances the property at its increased market value.
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Geography
Most hard money lending happens in lower-middle class neighborhoods where property values are relatively stable and blighted properties are available to purchase at significant discounts.
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Benefits
Investors with limited capital and less than perfect credit can participate in real estate investing by using hard money lending. By carefully analyzing properties, investments can be found that will more than compensate for the higher interest and fees charged by hard money lenders. Also, once a relationship has been established with a hard money lender, subsequent investments will be much easier to accomplish.
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Warning
Hard money lenders know their business and are more than willing to foreclose on a property the first time a loan payment is missed. Because of the lower loan-to-value ratio employed by hard money lenders, they can foreclose at any point and still make a profit. Investors need to be sure that they can accomplish the project and sell or refinance the property in time to repay the hard money lender.
