A hard money lender, also commonly referred to as a private lender or asset-based lender, plays an important role in real estate finance. The primary function of a hard money lender is to offer borrowers an alternative source of financing for real estate. Unlike many other traditional lending sources, hard money lenders place greater emphasis on the equity a borrower has in a property rather than their financial condition. For this reason, hard money lenders are widely recognized and commonly referred to as asset-based lenders.
Are Hard Money Lenders Loan Sharks?
One of the biggest misconceptions about the term “hard money” is that it’s either difficult to obtain and/or the lenders play hardball when the Borrower is unable to keep current on the payments. While the term “Hard Money” can be intimidating to many, the term hard money simply refers to the hard asset that the lender is using as collateral. And because hard money lenders focus on the equity offered by a borrower in a property rather then their financial situation, hard money lenders maybe a better option for the borrower than conventional financing.
How Does a Hard Money Loan work?
Rather than extensively evaluating the borrower’s financial condition, a hard money lender will focus on the collateral or real property that is owned and/or will be purchased by the borrower. Equity is important to the hard money lender because first, borrowers with substantial equity in their property are less likely to default on payments, and if they do default, the lender has a higher likelihood getting repaid its principal and outstanding interest from a foreclosure sale.
What types of loans will a Hard Money Lender Fund?
The quick answer, virtually any real estate asset that has equity. A common asset class used for hard money lenders include non-owner occupied single family homes or multi-family apartments, especially with the popularity of Fix and Flips. However, borrowers obtain hard money loans for commercial, industrial, retail, raw land, and various other real estate types.
Why is it so hard to find a Hard Money Lender that does Owner Occupied Loans?
The real estate lending industry is highly regulated. Due to the housing crisis, regulations were adopted at both the Federal and State level that intensified the lending requirements on owner occupied loans (also known as consumer loans). The regulations require lenders to carefully examine the borrowers financial condition to determine their ability to repay. If the borrower is unable to make the payments, the borrower may have recourse against the Lender by arguing the loan was predatory. Obviously there was some truth to this during the mortgage calamity, but most seasoned hard money lenders are not interested in funding loans that have a likelihood of default.
How is a Hard Money Loan structured?
No two loans are alike. However, a common loan structure for a Fix & Flip loan would be based upon the After Repair Value (ARV). Many hard money lenders will fund between 65% to 70% of the ARV. Because hard money lenders require the borrower have cash equity in a new purchase, the funds in the Fix & Flip loan are commonly spread over the purchase, renovation, and interest reserve costs with the borrower funding the majority of their cash equity into the purchase.
Traditional hard money loans will fund 50% of land value, 55% to 65% of value for commercial and other similar asset types, and may fund up to 80% of the current value of a single family home.
Why is Hard Money expensive?
Hard Money can be expensive but it’s relative. The cost can be attributed to the extenuating circumstances that do not fall within conventional financing guidelines. For example, if the borrower would need to close on a property in less than 5 days to capitalize on a good opportunity, the benefit may far outweigh the cost. Other factors that may affect the cost of a hard money loan include, the complexity of the asset type such as gas stations, low occupancy multi-family or commercial, or raw land or a borrowers poor / non-existent financial condition.
How expensive is Hard Money?
Fees and costs vary by Lender and are usually determined on a case by case basis with consideration to current market demand. Rates for a hard money loan may range from the low of 7% and go up from there. Hard money lenders may also charge points (calculated on the percentage of the loan amount) starting from 1 point, though 2 to 4 points are industry standard. Other fees charged by hard money lenders commonly known as junk fees include loan documentation fee, appraisal fee, credit review fee, and underwriting fee.
Are all Hard Money Lenders the Same?
Hard Money Lenders are not all one in the same. Most hard money lenders focus on a specific niche of the real estate industry. Some hard money lenders may focus on residential while others may focus on commercial real estate. Some hard money lenders are individuals (more commonly known as private lenders), while others are larger institutions that are typically financed by private equity firms. Other specifications include: loan size, asset location, loan duration, and borrower type.
Finding the right Lender
When working with a hard money lender, it is important to align yourself with a lender that specializes in your specific need and has considerable experience funding the loan type you are seeking. Typically, a Borrower will receive more favorable pricing and a more accommodating loan structure that is better tailored to their situation from a Lender that specializes in their asset type. You wouldn’t go to a hard money lender that specializes in large commercial real estate assets for a single family home. Don’t hesitate to ask the hard money lender the types of loans they have historically funded.
What is the Difference between a Direct Lender vs. a Broker?
Most hard money lenders are actually brokers that have connections to direct sources of capital. They do not have direct control over the funds they lend and will shop your loan to various direct lenders to find the best option for you. Typically, a borrower may pay additional fees when using a broker. There is nothing wrong with this scenario except the Broker should be upfront with the borrower and let them know they will be brokering the loan. Be careful to never pay a Broker an upfront fee to shop your loan. The Broker will earn their fee once your loan has funded.
About TaliMar Financial?
TaliMar Financial is a California hard money lender located in San Diego, CA that specializes in funding residential and commercial Fix & Flip, Construction, and Bridge Loans. As a direct lender, we offer high LTV ratios at below market rates and can structure a loan around your specific need. Contact TaliMar Financial today at (858) 613-0111 or visit talimarfinancial.com.