Hard Money Facts: Myths Debunked
Myth: Hard money loans are so-called because the lenders and their terms are hard to negotiate or approve.
Fact: Hard money loans are so-called because the lender is not a bank.
The “hard” in hard money actually refers to the difficulty of the project itself. For example, virtually every hard money project proposal harbors at least one or more of the following circumstances: money is needed quickly, often within a week; the borrower has little or no cash equity, and cannot raise a sufficient amount or is not willing to sacrifice an equity interest in the project to an investor; the borrower has a history of bad credit; the borrower has tried for several months without success to obtain financing; the project itself is problematic or has significant questions; there is no exit strategy for the loan.
Myth: Hard money loans are excessively expensive.
Fact: The nature of real estate investments does require that hard money lenders adopt a firm stance with regard to their qualification conditions, but not loan terms.
Hard money loans are actually priced just like any other loan. If a Fortune 500 lender were offering a quote on the same loan, their pricing would be very similar. The difference is that it would not be referred to as “hard money” simply because of their status as a lender. Therefore, a borrower seeking quotes for comparison on a hard money loan will generally find the competitive proposals to be priced very similarly. The final choice, then, should be based on the lender’s reputation and ability to close, the conditions associated with each proposal, and the chemistry between the two parties.
Myth: Hard money lending companies are disreputable loan sharks.
Fact: Most heads of hard money lending firms have successful backgrounds as investment bankers, real estate developers, lawyers or accountants.
To be successful (read: profitable) hard money lenders must be capable of both assessing risk and closing loans. They are professional business people who understand the way the system works. As hard money lenders base take the After Repair Value of an investment as the most significant factor in underwriting a loan, real estate expertise is essential for success. In fact, Intrust Funding’s Portfolio Manager has an ARV projection accuracy of 98%, making Intrust Funding’s loans some of the most secured in the industry.
Myth: Hard money lenders want you to fail so they can obtain your collateral.
Fact: Most hard money lenders only fund investment properties that they think will succeed.
Hard money lenders have an unfair reputation of preying on unsuspecting borrowers in an effort to take their property. While there are bound to be scams out there, most hard money lenders are not like this. The truth is that it is in the hard money lender’s best interest to protect your investment and theirs. While not all hard money lenders are investors themselves, many are, and hard money lenders are well versed in evaluating investment properties.
Since hard money has not been standardized like traditional mortgage lending has, the borrower experience can vary widely from one lender to the next. It’s possible that hard money lending’s negative reputation stems from upset borrowers, but the cost and time associated with loans can be a drain on the lender’s resources, so hard money lenders truly want your loan to be successful and paid off.
If you’re new to investing or new to borrowing you may be hesitant to borrow from a hard money lender, however, hard money is an excellent alternative to all cash or strenuous bank financing. In fact, Intrust Funding’s simple, efficient, and reliable loan process has been a hit with veteran and amateur real estate investors in Western Washington. We’re proving that borrowers can be partners.