Hard Money lenders are misunderstood

hard money lender

As a private lender, or a “hard money lender”, I feel like I’m constantly educating people about my business. First off, people try to tell me there is a difference between a hard money lender and a private lender, but I don’t see it. Simply put, a hard money loan can only be issued by a private lender. A private lender can be lending company backed by investors or it can be just a single individual lending his/her own money to a real estate investor. Banks or conventional lenders are regulated, private lenders are not. Given that private lenders are unregulated, they have the flexibility to customize their loan program guidelines as they see fit. I like to call it common sense underwriting vs check the box lending. The term hard money came about because private lenders primarily look at the “hard asset” or the value of the real estate as their source of repayment.  I use the term “hard money” in my writing and marketing materials so people immediately know what I do. It’s a recognized term, but an unwelcome one from my perspective because there is definitely a stigma that surrounds the term hard money. In this article I’m going to address the stigma head on and debunk what I see as the 5 major myths of my private loan program.

#1 – Borrowers that use hard money lenders are desperate, not bankable, or have bad credit.

This couldn’t be further from the truth. Sure, hard money lenders come in all shapes and sizes, so there are lenders out there willing to take on a borrower as long as the value of the real estate supports their loan and the borrower has a pulse.  However, I can’t tell you how many borrowers come to me simply because they can’t stand the amount of paperwork and lengthy process of obtaining a conventional loan. The number 1 reason borrowers come to me is for speed, not because they can’t get a bank loan. They like that I don’t need an appraisal and I can close loans in 7 days. One of the first hard money loans I closed was a $250,000 loan on a vacation rental property worth $1MM+ in Newport, RI. The borrower had just purchased the house in cash for $850,000, had perfect credit, and he actually had a bank commitment in hand. He came to me because he just wanted construction funds fast without the hassle of dealing with a bank. He was willing to pay 12% instead of 4.5% because he knew that he could finish the renovation with my funds before the bank could close their loan.

#2 – Hard money lenders are loan sharks or they loan to own.

I want the borrower to be successful and my hard money loan to be repaid so I can use those same funds make new loans.  I don’t make loans that are doomed to fail, whether it be providing too much leverage, or charging interest rates that the borrower/deal can’t afford. I definitely do not want to take back or foreclose on your property. The process of foreclosing on a house is costly and it takes a lot of time. If I have to foreclose, I want to make sure the property will sell at auction for greater than my debt. Otherwise, I have to step into the borrowers shoes, complete the renovation, and then market/sell the property.  Meanwhile, I’m not earning interest or any compensation for my time and effort, and it takes me away from closing more loans.

#3  – Private money loan interest rates are too expensive or cost prohibitive

Private lenders charge higher interest rates, there is no doubt about it. That said, I believe the spread between conventional rates and hard money rates is more than made up by our speed. Experienced real estate investors understand time value of money. Often times our hard money loan program allows our borrowers to act quickly and buy a property for less. Our fix and flip borrowers can purchase and be almost finished with their renovation before they could close a conventional loan. However, the reality is that without a private loan the borrower may not have been able to purchase the property at all.  My borrowers use my private loan program to present sellers with a cash offer. Most sellers are looking for a fast closing with no financing risk so my borrowers have a competitive advantage.

#4 – Private lenders don’t need you to fill out or provide any documents to support your private loan.

Private lenders will absolutely need document support to approve and close your private loan. The amount of paperwork is far less than conventional lenders given that hard money lenders are looking primarily to the value of their collateral. Hard money lenders typically won’t take a deep dive into the borrower’s financial condition. I don’t look at debt to income ratios, ask for pay stubs, and I don’t require borrowers to provide tax returns. However, I do ask borrowers to fill out a personal financial statement (PFS) and a real estate owned (REO) schedule. I’ll ask first time borrowers to provide a resume/BIO, and proof of past real estate investment experience. If you are looking for a fix and flip loan I’ll ask for a detailed budget, and if you are looking for a new construction loan I’ll ask for plans and specs. Regardless, hard money loan programs are designed for speed and efficiency, that’s what you are paying for.

#5 – Hard money lenders make risky high leverage or no down payment loans.

Borrowers come to me seeking 100% financing all the time. I often hear “I’m buying the property at a significant discount, and the after repair value puts you at 70% LTV without an investment on my part”. I laugh because most of the time these properties are being actively marketed on MLS and every other online platform so clearly the borrower is paying  market value for the property. Regardless, hard money lenders want “skin in the game” on the part of the borrower. They want the borrower to have an investment in the property that is material enough that they will protect that investment in a downside scenario. I size my loans at 85% loan to cost (LTC), and I target loan to values (LTV) of 65-70%. In fact, the average LTV in my private loan portfolio is 65%. Conventional lenders will actually lend at higher levels than I will, 75%-80%.

There is no doubt that hard money lenders come in all shapes and sizes. As a borrower, it is important that you know exactly who your private lender is, especially now that there are a lot of lenders coming out of the woodwork saying they are “direct private lenders”. Experienced real estate investor come to me for speed, flexibility, and my ability to understand local markets. I am actively lending and would love the opportunity to finance your next real estate investment.

Michael Chadwick runs EMCAP Lending, a direct private real estate lender based in Cranston, RI. EMCAP lends it’s own money and is capable of closing loans from $150k-$4MM in as little as 7 days!

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