Do trillions of dollars of failed loans and losses lead to great lending times?
With the recent collapse of the credit markets, the economy, real estate prices, and the stock market, lenders around the world will take massive losses on their loan portfolios. Large lenders such as Washington Mututal, Indymac, and related entities have already failed.
The write downs on collateral and loan values could make most (if not all) lenders insolvent. So doesn’t it seem strange then that lending on real estate assets could deliver both a high yield AND safety (low risk)?
As strange as it sounds, hard money lenders are well positioned in this market cycle to generate the highest income with the most security. Let’s look at why.
Why Are Hard Money Lenders Needed In Today’s Market
In today’s market with a huge inventory of distressed properties such as foreclosed homes and even commercial real estate, investors and “flippers” are buying these properties at a huge discount.
There’s only one problem: These distressed deals usually require a quick close (sometimes as little as 1 day at a trustee sale auction).
Most traditional lenders would not be much help in these scenarios – not that they are willing or able to lend money on real estate purchases these days. Even if they were, it would take too long (45-60 days) and require perfect credit from the borrower.
Of course, deep-pocket buyers could pay all cash to buy the distressed properties all day long if they wanted. But what if they want to buy but don’t have enough cash of their own? Or, they do have the cash to buy one property but want to buy multiple properties at the same time?
For some experienced flippers, the number of properties they can buy at one time can make a huge difference in their bottom line profit.
Enter the hard money lender, who can fund deals quickly and is willing to overlook the borrower’s less than stellar personal credit, as long as the property meets their deal criteria.
Typical Hard Money Loan Terms
- Short term: 6 to 18 months
- Application or due diligence fee around $500 to $1000
- Origination points 0% to 5%
- Interest rates 10% to 18%
- Prepayment fee (if the loan is paid off earlier than expected)
- Recorded first trust deed (lender has first lien on the property)
- LTV of 60% to 80%
Why would hard money lenders fund deals that traditional lenders reject? We’ll discuss the 2 main reasons in Part 2. Meanwhile, please add your comments and questions below.
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More power to you!
Hi DJ,
Thanks for the comment! Good to hear that you had a good experience with a hard money loan. We are looking at this model here in Scottsdale so we’ll have our own experience to report at some point in the future.
Are you heading out this way any time soon?
Hard money can be a real win-win. My best RE deal involved borrowing $400k at %12 for 5 years while the land use was changed. Paid off handsomely for the lender, broker and myself. Most deals are shorter than that, but this one was complex. I never met the lender, though I know who they are. The broker made it easy for both parties.