Why Borrow Hard Money
Why borrow hard money? To understand why so-called hard money is so important in the real estate marketplace today, we need to know what the term actually means. As you might expect, hard money, or private money, has interest rates and fees that above the norm when compared to a conventional home loan. So who would take out a mortgage that automatically has higher rates and closing costs? That’s a fair question and one that deserves an answer. But once explained, we feel you’ll agree that without hard money, real estate values can be harmed.
Hard money loans look for the end goal in mind and not the initial project. Conventional and government backed loans approve both the borrower as well as the property. The borrower must qualify based upon income, credit, assets and other factors but the property must pass muster as well. The property must be in good condition. It must be marketable in its present form. There must be similar properties in the area of the subject property that have recently sold and that supports the sales price of the new property. If either the borrower or the property does not get approved, the entire loan application cannot be approved.
For example, a real estate investor has been looking at a duplex in a neighborhood that has been run down. The property obviously needs some work. The roof is sagging a bit and the front porch is in bad shape. There has been a “For Sale” sign in the front yard for months now but due to the current condition of the home, no bank will place a loan on the property. The bank needs the collateral to be marketable as security for the loan. Because no one will place a loan on the property, the duplex falls into a further state of disrepair.
But this is where hard money comes into play. A hard money lender doesn’t necessarily look at the property in its current state but what the property will be like once all the repairs have been made. The hard money lender looks at the end game and sees the entire picture. What the hard money lender does look for is a qualified borrower but more importantly the “exit strategy.” The exit strategy is the buyer’s plan to retire the hard money loan.
The investor can provide a plan that shows the duplex can be sold for far and above the acquisition price and still have funds left to take care of the hard money loan. Or, the investor can present a plan to keep the property long term for monthly cash flow and property appreciation. Once the property has been completely rehabilitated, a traditional mortgage can be used to refinance out of the hard money loan and into a permanent one.
Without the benefit of hard money, real estate values can be hampered simply by the existence of a dilapidated structure in a neighborhood. Turning a distressed home into a newly rehabilitated one increases the value of all homes in the neighborhood.