NEGOSENTRO.COM | Hard Money Difference and How to Build Wealth Using It | What do you need to be a successful real estate investor? You need to have the ability to find deals priced below market and put then under contract. You need to have the skills to manage construction crews. But above all, you must have access to liquid capital on terms that make sense. Conventional lenders fail to recognize that real estate investors have special needs when it comes to the speed and adaptability of their financing. In contrast, hard money lenders fulfill real estate investors needs by delivering just the right kind of financing on terms and conditions that make sense.
Hard money loans are made available by companies often referred to as hard money lenders or private lenders. Typically, they are privately-owned firms that offer their very own cash. Hard money lenders do not finance primary residences and do not lend to consumers. Because hard money loans are considered to be commercial or business loans, they are regulated differently from conventional lenders. For the most part, hard money lenders are free to develop their own underwriting criteria that reflect their distinct risk appetite.
Conventional lenders are different from hard money lender in at least three key areas:
1. Conventional lenders avoid lending on dilapidated properties.
Conventional lenders such as banks and credit unions do not lend on homes in need of repair. This is why many listings for distressed houses come with disclosures such as “Handyman Special” or “Sold Strictly As-Is.” These disclosures are codewords that the building would not pass the conventional lender inspection or appraisal.
In contrast, hard money lenders are in business on financing the purchase and renovation of distressed commercial or residential properties. By basing their loans on the anticipated after-repair value of the home instead of its present value, they offer their customers the optimum leverage.
The after-repair value or the ARV is a future price of your home once you wrap up your renovations. It’s calculated by an accredited appraiser who compares it to various other rehabbed homes in the community of the same size and type. The ARV-based lending an indisputable benefit to real estate investors. “The bigger is the spread between your purchase price and you after repair value, the more leverage we can offer you,” – says Kyle Sennott, the Managing Partner in New Funding Resource, a hard money lender in Maryland.
2. Hard money lenders provide substantial underwriting flexibility.
Hard money loans are often referred to as asset-based loans. Instead of focusing on the borrower’s credit and income, their underwriting is centered around the borrower’s ability to generate profit by fixing-and-flipping a certain property.
3. With a hard money loan, you can close in days versus months.
Another reason why conventional lenders fail real estate investors is the speed of closings. Sellers prefer to close swiftly and with no hassle. No one will wait 45 days for your lender to make their decision when they can work with an all-cash buyer who can close in a week or less. Because of their straightforward underwriting requirements, hard money lenders can close as soon as your title company delivers an insurable title.
Summary
Hard money loans are not for everyone, and not everyone will qualify for them either. However, for many investors, they offer a fast and nimble source of capital not available from traditional lenders.
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