If you look at the ways of financing your real estate deals, you will find that very few experts mention hard money lending in this regard. With easy availability of finance form banks and other lenders at down to earth interest rates and various mortgage options, most investors do not think about hard money as a source of finance for their deals. But there are situations where hard money loans can mean the difference between success and failure provided you know how to make the most of this form of finance. Most traditional lenders disburse loans inside their local market and they also place rigid conditions regarding inspection of the property. This is not the case with hard money lenders who can finance a property anywhere across the country. They also rarely travel to inspect the property that is being purchased. Finally, these lenders rarely possess the kind of knowledge about local property market that is shown by a traditional lender.
Their valuation methods are different
Traditional lenders closely monitor the credit score of the investor, his income, and credit history. They give out a mortgage loan to the tune of 80-90% of the value of the property. However, hard money lenders are more concerned with the value of the property rather than the income and credit history of the investor. They go for two three different valuation methods to make sure that the property is indeed valued at a price higher than what they are giving to the investor. They take a close look at the records of tax assessment to ensure the fair market value of the property. They rely heavily on the broker’s price opinion (BPO) that is the advice given by the broker about the price of the property.
They have a very conservative approach
Hard money lenders put emphasis on the value of the property rather than the price the investor has negotiated to pay for it. Their main objective is the ability to recover their money in case the investor defaults through the sale of the property. As such, they also pay attention to the pricing trends in the housing market as well as rate of appreciation of real estate in recent times. If they believe they can recover their money even in the case of a crash in the housing market, they move ahead and disburse the money to the investor with very little conditions. As a measure of protection, hard money lenders rarely give out more than 50-60% of the value of the property in the form of loan. This means an investor needs to arrange the remaining money from some other source. Also, these lenders are interested in knowing what an investor plans to do after buying. Does he intend to fix and flip or use the property for rental income after renovation?
Hard money is available quickly
The biggest advantage of hard money loans is that they make available money quickly to the investor. They are provided for short duration's (usually 6 months to 2 years). Lightning fast disbursal makes hard money loans advantageous for investors when they need to beat the competitor by closing the deal quickly. You can close the deal in a matter of days once your application has been approved by the lender. This ability to finance a project at a lightning speed means an investor can secure the deal by beating his competitors. However, you need to develop good relationship with hard money lenders to secure financing at such a fast speed when the need arises. If there is a wonderful deal that will not last for a long time, it is hard money lending that comes to your rescue.
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As a top producing Realtor and Property Manager; Terry specializes in sales, extensive construction homes, rentals, REO’s, short sales, and all aspects of Real Estate. After graduating the University of Michigan with a master in MBA, Terry continued his endeavor and now has over 15+ years of experience in the Real Estate world. If there is anything that has to do with Real Estate and sales, you can always be sure of Terry to provide important, specialized knowledge.
