Imagine a world where you have all the money you need, all the credit you could get, and banks pounding down your door to give you large sums of money for low interest. Nice isn’t it? However, the real world is a much darker place. In reality, trying to get financing from a bank is often like trying to shave Chuck Norris’ beard while he sleeps. It’s just not possible. As they say, necessity is the mother of invention and Hard Money is the invention birthed by the need for financing.
What is Hard Money?
Hard Money is money that is obtained from private individuals or businesses for the purpose of real estate investments. While terms and styles change often, Hard Money has several defining characteristics :
- Based on the value of the property
- Short Term (6 – 36 months)
- High Interest (8-15%)
- High loan “points” (cost to get the loan)
- Often do not require income verification
- Often do not require credit references
- Quick ability to fund
- O.K. with property in poor condition
How Hard Money Is Used:
Compared to typical bank financing, Hard Money is ridiculously expensive! Why would anyone use Hard Money? As I mentioned early: necessity. It may be an expensive way to do business, but if those costs are factored into the equation, it just might work for some people. When investors cannot obtain normal bank financing, we will often use hard money as a “bridge” between purchasing and the resale or refinance.
Often times, house “flippers” will use hard money (as I have) to buy a property, fix it up, and sell it again. When it works, it works well. The lender may charge 4 points (4% of the loan) and a 12% interest rate, but if those costs are figured into the cost of the project this number is inconsequential.
How Do I Find Hard Money Lenders?
Hard Money Lenders can be difficult to track down, but there are several easy ways to find them.
- Look online. Many hard money lenders (both national and local) have websites and they need you as much as you need them. Search Google for Hard Money Lenders in your state to find some.
- Ask a Mortgage Broker – Some, not all, mortgage brokers can connect you with hard money lenders – for a fee.
- Ask House Flippers – Find some house flips that are on the market and find the owners or attend your local real estate investment club and ask around. Referrals are often the best way to find anybody good in business.
- Ask a Real Estate Agent. An agent that works with lots of investors should know several hard money lenders – or at least be able to get you in contact with someone who knows them.
Should I Use Hard Money?
I have used Hard Money on a number of occasions, but I try to steer clear whenever possible. I am a strong believer in security and in the “buy and hold” method of investing. Hard Money – with its short term lengths – do not fit well with my investing strategies. I like to think in terms of “worst case scenarios”. If I try to “flip” a house using Hard Money, and am unable to sell that house before my term is up, I am in danger of losing the house to the lender. I only use hard money when I have a clear exit strategy on a flip and secondary funding available as a backup.
Hard Money can be a great way to get into the “flipping” business, if that is the business model you are looking to get into. However, you must weigh the risks with the reward to decide if this is a path you want to go down.
P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.