Hard Money Lenders: Loan Sharks of the Real Estate Industry

by Brandon · 12 comments

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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.

  1. 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.
  2. Ask a Mortgage Broker – Some, not all, mortgage brokers can connect you with hard money lenders – for a fee.
  3. 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.
  4. 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.

About Brandon

has written 199 Awesome posts in this blog.

Brandon Turner (G+) is the BiggerPockets.com Senior Editor and Community Director and owner of RealEstateInYourTwenties.com. He is also an Active Real Estate Investor (Flips, Apartments, and Buy-and-Hold), Entrepreneur, World Traveler, Third-Person Speaker, and Husband. Come hang out with him on Twitter!

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.

P.S. Looking for more real estate investing knowledge? If you are interested in a top-notch course to help you understand the nuts and bolts of creative real estate investing, I would like to recommend Ben Leybovich's Cash Flow Freedom University. Ben is a close friend and has been my trusted adviser for years. He's a smart guy and CFFU is pretty awesome. The course is waitlisted, but while you wait for an opening Ben will send you tons of FREE content. Seriously. Click here to check it out.

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{ 10 comments… read them below or add one }

Derek June 24, 2012 at 8:17 am

Hi Brandon!
I’d just like to say that I am loving your website, as I’m interested in investing in real estate, but don’t know that much about it. Considering my inexperience, you’ll please excuse me if the answer to this question is obvious.
If I get a loan from a hard money lender, is there a way for me to refinance that loan with a bank later? I like the idea of getting fast money for rental properties, but I am more interested in buying homes to rent out, buy and hold as you say, and the short term of these loans wouldn’t really work. If this is an option, will I need to meet certain requirements?

Reply

Brandon June 24, 2012 at 3:50 pm

Thanks Derek!

Actually, that is a great question. And the answer is yes, you can refi to a bank (and should as soon as possible!)

Some hard money lenders may have pre-payment penalties, which means they might charge you a fee if you pay off the loan too quick. I’d try to avoid those lenders though, and they are few and far inbetween.

Hard money lenders are a good way to buy a property quick and cheap, fix it up, and then refinance into a nice 15 or 30 year loan. If you do it right, and find the right deal, you may even be able to do the deal this way with no money of your own used – or at least get it back when you refinance it.

Keep in mind, however:
1.) Hard Money is expensive, so be sure to figure those costs into the deal. They usually charge between 4-10 “points” (4-10% of the borrowed money, usually added to the loan) and between 10-15% interest payments.
2.) Don’t get stuck with a hard money loan that you can’t refinance out of. Make sure your credit, income, and debt are in proper order before buying the property. The best way to do this is to just go talk to a mortgage professional (it’s free!) In other words- make sure your exit strategy is firmly in place before taking the risk with Hard Money.

Best of luck!

Reply

Tyrell August 11, 2012 at 11:08 am

Hi Brandon

Again, a great website.

I am from Australia and looking to do the hard lending to refinance option. Do you know how hard or easy it is for a foreign alien from Australia to get a hard money loan followed by the refinancing from a bank? Last I heard, financing even for Americans is hard to get these days. I’ve got a feeling getting a hard money loan might not be that hard, but I might run into problems with refinancing. Any thoughts?

Thanks

Reply

Brandon August 13, 2012 at 3:54 pm

Do you live in Australia right now? Or investing in America? Refinancing can be tough, but I don’t think your location matters as much as your job status, credit score, and income level. The bad thing about the Hard money to refi strategy is that it only works a few times – and then the banks will stop refinancing. I’d talk to a bank first about getting a mortgage on an investment property. If they would let you do that, then most likely they would also let you refinance.

Reply

Hard Money School September 26, 2012 at 6:18 am

Mortgage broker would be the best option to find hard money lenders as he is in the market and having a close eye to every deal. Online can also be good option but i personally feel that mortgage broker would be the most appropriate option and you should try to go with it.

Reply

Brandon September 29, 2012 at 4:22 am

I have actually never used a Mortgage Broker to find hard money, but I do believe it would work great. Thanks!

Reply

Damjan March 29, 2014 at 10:31 pm

Hey Brandon, nice article. My question is, what happens if you do not sell the house for whatever reason by the time your loan is up, what happens then? For example, I get the hard loan for 6-12 months but I wasn’t able to sell it within that time. Thanks.

Reply

Jeff March 10, 2015 at 4:27 pm

In this situation, a reasonable hard money lender would extend the term of the loan for you past the initial agreement as long as you have been making all of your payments. Check with your hard money lender to ensure they will allow for this prior to finalizing the loan.

Reply

regina February 20, 2016 at 8:31 am

I need a hard money loan to pay off back property tax,the only way to pay the loan would be to get enough to pay back taxes and do minor repairs to my home and sell it then pay the lender back my home is paid off free and clear and worth about 340,000 dollars would a lender loan to me in this case?

Reply

Erick December 17, 2016 at 8:02 pm

What about buying a place to rent out short term like vacation rentals. I want to get some property in Costa Rica and rent it out by the week but I’m not sure the best way to get started.

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