September 15, 2017 by Brandi Jackson
It is an axiom of business that every venture or transaction will either sink or swim. The absolute truth expressed in this saying is that success or failure are the only two outcomes, and eventually it all ends in one place or the other. Naturally, real estate investors aim for success, and doggedly overcome obstacles in order to achieve it. Fortunately for them, there is a network of hard money lenders built to help them achieve their goals by providing financing for real estate projects that would otherwise sink into failure.
Hard Money Lenders Make Loan Decisions Quickly
Hard money lenders are private lenders who have little if any bureaucratic structure. The application, review and decision process is expedited. Hard money lenders are experienced in lending and are able to make credit decisions quickly. It is possible to obtain financing for a real estate investment in only a few days. In some situations it is possible to get a next day or same day decision. This lightning response has obvious benefits for the real estate investor.
Those benefits include the ability to close on a property quickly. Many sellers can be motivated by the possibility of closing a transaction quickly, and may even be willing to accept a lower price in exchange. Hard money lenders make this a real possibility. Experienced real estate professional knows how to supercharge the acquisition process by turning to hard money lenders.
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Short Term Hard Money Loans
Hard money loans are typically very short term. They rarely extend more than a few years, and may be as short as a few months. This makes them absolutely ideal for fix-and-flip transactions or any other real estate investment that looks to realize an increase in value quickly. Of course, selling the financed property is not a requirement of paying off a hard money loan. Conventional bank financing can also be used to replace a hard money loan.
Hard money loans are typically interest only. This also greatly benefits the short term real estate investor since it reduces the monthly payment on the loan. A balloon payment at the end of the loan term may loom large and intimidate a novice real estate investor accustomed to amortizing a mortgage balance over a term of 1 or 30 years. On the other hand, experienced professionals understand that interest-only loans are an excellent application of leverage.
Real Estate Investors Need Strong Collateral For Hard Money Lenders
Not every real estate investor has the strong credit rating conventional lenders want to see on a loan application. In some transactions the best feature is the value of the collateral security. Many hard money lenders look at this as the primary consideration because strong collateral means that they are in a secure lending position. Low loan-to-value ratios make for a good hard money application.
This feature can work in combination with the ability to obtain a quick credit decision. Real estate investors are often on the prowl for properties with good potential. Finding the rare diamond in the rough with a highly motivated seller often means acting before someone else can put their hands on it. Hard money lenders focus on the value of the real estate will lend on these transactions. Conventional banks will spend weeks evaluating the market value.
Hard money is one of the most versatile tools available to the seasoned real estate investor. The ability to obtain a quick credit decision that extends for only a short term based on the market value of the property almost perfectly describes the financing needs of a fix-and-flip investor, but thinking of hard money in these terms is far too limited. Hard money can be an excellent option anytime any of these three features are a primary characteristic of a real estate loan.