What Exactly is a Hard Money Lender Anyway?
by Steve Cook

Private or "hard money" lenders are privateindividuals with surplus money available for investment. Some have deeppockets while some have limited resources. Based upon their own personalcriteria, they lend this surplus money, primarily on a short-term basis,to real estate investors who use it for a variety of profitable purposesincluding buying and repairing distressed properties.

Why is it called "Hard Money"?

Don't beconfused by the term "hard money." It doesn't mean that this money isdifficult to find or obtain. Actually, it is some of the easiest money toprocure. So why is it called "hard" money, you ask? Good question. In theworld of finance, money is either "hard" or "soft."

Hard money hasstricter terms and a clearly defined repayment schedule. Softer money haseasier terms and a more flexible repayment schedule (e.g., debt servicesubject to available cash flow). In the case of private financing, theterms for hard money loans are exceptionally harsh with very low loan tovalues (LTV's), higher than market interest rates, and a lot of upfrontpoints.

Typical Terms for Hard Money Loans

Terms forthese types of loans will vary from lender to lender and will depend uponthe experience level of an investor as well as the length of an investor'srelationship with a particular lender. Generally, a hard money lender willprovide a loan for 50-75% of the after-repaired value of a home at aninterest rate of 12-18% for a period of 6 months to five years. They willalso charge between 2-10 points as an upfront financing fee.

Asyou invest, you will discover that these terms will vary from lender tolender. Some will only charge interest while some will amortize theirloans. Some will lend repair money; others won't. Some will place therepair money in escrow to be drawn out as the work is completed; otherswill let you leave the settlement table with it. Some will lend closingcosts; some won't. Ultimately, when finding hard money lenders, you willneed to determine their terms and how they might fit into your plans as awholesaler.

Lending Criteria for Hard Money Lenders

Liketerms, lending criteria also varies from lender to lender. Each has theirown preferences with regard to areas in which they will and will not lendand types of investors to whom they will and will not lend. Some willcheck your credit, some will not. Some will do their own appraisals, somewill not. Some will charge for an appraisal, others won't. Some willcharge an inspection fee for each draw from the repair escrow, otherswon't. Some will only lend in certain areas while others will lendeverywhere.

Some are more numbers-driven when it comes todecision-making while others go more on their feelings about you and/orthe neighborhood. What about my credit? With terms so favorable to thelender, most hard money providers are concerned primarily with the valueof the property, placing less emphasis, if any, on the credit of thepayor. They just want to know that in the event the payor defaults theywill possess an asset from which they can extract their originalinvestment and possibly more. However, this is not to say that lendersdesire to go through the hassle and expense of taking back and reselling aproperty but merely to point out that due to the terms of the loan,private lenders are secured, and feel secure, whether a borrower pays ornot.

Hard Money Lenders Are People, Too

You mustkeep in mind that most hard money lenders are private individuals. Theyare not institutional investors who have a set standard of guidelinesdictated by the federal reserves. They can be flexible, they can be tough.They are people just like you and I. You can talk to them. You canbefriend them. You can laugh and joke with them. They can be yourneighbor, your doctor, your attorney, or your bus driver. They usuallydon't advertise that they lend money, but instead are found through wordof mouth.

A Great Resource

Hard money lenders are a great resource for realestateinvestors, particularly a beginner with limited resources (e.g. cash andcredit). Having a hard money lender on your team enables you toconfidently make offers on properties. It enables you to purchaseproperties when your offers get accepted, and it provides you with thefunds necessary to do the repairs if needed. In fact, I have heard of somecases where individuals have even been able to borrow holding costs, but Ihave never met any lenders myself who will actually do this.