The Importance of Hard Money Lending
The term “hard money” has been used in the real estate and finance industry for decades yet the term itself may be a bit misleading to those who have never taken advantage of this financing tool. Just the term “hard” implies it’s not a very good deal because the loan terms aren’t very favorable compared to other loan programs and is just taking advantage of someone’s current situation. Yet that couldn’t be further from the truth. Hard money, or private lending, is a critical piece in the real estate puzzle. Why is hard money so important if it’s only used in a select set of circumstances?
Real estate investors know why and when to access hard money. Hard money is used to get from one place to another, something of a bridge loan. A property is priced well below market but needs some work before a traditional loan can be used. Once the needed repairs are made however, most any loan can be used for permanent financing including conventional and government-backed loans.
Let’s look at a typical situation. A real estate investor sees a duplex that is vacant and has been for some time. The roof needs some obvious work and the pier and beam foundation is in poor shape. The property has been listed for months but due to its condition no one can finance it. The only buyers are those with cash or using a hard money loan. The way the property looks now, few people would even want to own it and looks like nothing more than a tear-down which can get expensive to raise the property and build new from the ground up. But a real estate investor knows what to do.
The investor visits the property along with a licensed contractor. They go, room-by-room, carefully inspecting the structural details of the house along with plumbing, electrical and HVAC system, making note of the items that need to be repaired or replaced and the approximate cost to do so. Real estate investors often visit the property twice to make sure they didn’t miss anything and hire a licensed appraiser to value the duplex “as is” and “as repaired.” The as repaired price is what the property could be sold for once all the needed repairs have been made.
But none of these repairs will take place without the investor paying for them out of pocket or leveraging the transaction with a hard money loan. Hard money loans usually only last as long as it takes to acquire and rehab the property and a common hard money loan term is a year or so. Once the repairs have been made, the home is placed on the market for a nice profit. Instead of the duplex falling further into a state of disrepair, bringing down the values of other properties in the area, it is bringing them up. Buyers now have financing options just as with most any other property. Without hard money lending however, none of this is possible.