A hard money real estate loan is one that in most cases will be secured by land, dwellings, buildings or other types of real estate. Sometimes they are secured by other assets. They are typically used by investors because of the gaps created by banking industry red tape. This type of financing differs from conventional financing in several ways. All of which are important to the would-be investor.
Real estate hard money loans are offered by private lenders. They can conclude a transaction faster than a commercial bank. If you go to a bank to apply for a loan, you meet with an employee who takes your information. Often, you will not have all of the information that you need, so you will be required to make additional trips to the bank. Sometimes, the employee will forget something and you will make another trip to the bank. Just the application process can take weeks and still, you might get turned down.
The banks have been having some financial problems of their own, lately. Large numbers of defaulted loans have reduced their currency reserves and the federal government will not allow them to continue to make new loans if their reserves fall below the minimum. Many banks are refusing more applications than they approve. Some are not approving any new loans at all. Private lenders do not have the same problems. So, a hard money real estate loan is faster and easier to get, but there is another reason that this type of funding is becoming more popular.
You may have heard or seen advertising from real estate investors that want to teach you how to buy property with no money down. Usually, they are selling books, videos or promoting seminars. What you will learn is that you find a property that needs some work, maybe a lot of work. You determine what the property would sell for in “mint" condition. You make the seller an offer or get them to hold the property for you while you find financing.
So far, so good, but if you go to a bank for a loan, you will be required to make a down payment, typically 20% of the price and you will pay closing costs out of pocket. The bank will not finance the cost for repairs, so if you get a bank loan, you will need to use your own savings or capital for rehabbing. In order to truly buy no-money down real estate, hard money loans from a private company are the only way to go.
If the after repair value is right and the purchase price is right, rehab funding providers will roll in the closing costs, the costs for repairs and the purchase price. This is what allows you, the real estate investor, to buy property with no money down or at least very little. They even have free advice for investors about how much to offer the seller and how to determine what the fair market value will be after you finish the repairs. In other words, they help you figure out what your profit will be. That can help you decide whether or not the property is a good investment after all.
So if you have your eye on a property and you have to act fast, real estate hard money loans might just be the solution for you.
James has been in real estate for over 30 years and is an expert on residential and commercial hard money loans. He is a regular contributer to Hard Money Lending , a comprehensive resource for those looking to secure funding for real estate projects.