Hard money loans are often used for short term needs such as real estate investment acquisitions. These loans are usually financed for 30 days to five years.
In contrast a traditional mortgage is available for 10 to 30 years. However when purchasing a distressed or vacant real estate property, it is difficult to obtain a traditional mortgage.
For this reason, hard money loans are commonly used by real estate investors for new acquisitions.
Here’s an example:
A real estate investor finds an apartment complex for sale.
This complex is in complete disrepair and vacant.
It is very difficult to get a mortgage on distressed or vacant real estate that is not generating income.
This real estate investor has two options to purchase this apartment complex, since they cannot get a conventional loan.
- Receive a loan from a partner, friend, or family member.
- Use a hard money loan to buy the property. The hard money loan
will also cover cost for repair needed on this apartment complex.
Once the property is rehabbed and ready for rental, which could take 6 months. The real estate investor obtains a conventional mortgage to repay the hard money loan.
This is an example of a short term loan used to acquire a property but not intended as permanent, traditional financing.
Real estate investors have long used private money lenders to finance their real estate investments. A real estate investor, who we funded loans for in the past, confided in me that he was preparing to do a new property acquisition using a friend’s private funds. His friend was planning on advancing him the funds to purchase the property, and in return, would charge both interest on the funds and a small percentage of the profits. I asked how the lender planned to secure the loan and the investor informed me that the lender would only require a promissory note to be signed to secure the loan. So, what is the problem with this private lender making a loan to this investor?
The Promissory Note
The problem is with the Promissory Note that is intended to secure the debt on the property. A promissory note is only a “promise to pay,” but it is generally not recorded. In order for a private money lender to secure repayment of a promissory note with the real estate, a lender must use a deed of trust, or a mortgage. If the private lender makes the loan to the investor and secures it to the real estate with only the promissory note, this will not be sufficient security. A deed of trust is sometimes referred to as a security document because it secures the promissory note to the real estate by creating a record in the County where the real estate is located. This recorded document creates the lien against the property that is a notice to the world that there is a debt owed to the lender. Without it, the investor could resell the property without paying back the lender.
Pay attention to this if you’re planning on making private money loans to friends, investors, and others. Always use a Deed of Trust or a mortgage to secure repayment of a promissory note with real estate. Further, consider using a seasoned, Private Money Loan Broker to handle your next private money loan transaction to make sure it is done correctly. A seasoned Private Money Loan Broker understands all of the steps and documentation requirements to make sure you’ve secured your debt properly for piece of mind. To learn more, check out a recent post we wrote on this topic, ‘How to Become a Hard Money Lender.’
Real estate investors have long used hard money lenders to finance their real estate investments for reasons of speed and flexibility. But for those who have never taken out a non-bank loan before, there are certain things every real estate investor should know about hard money lenders. Here are just 3 things every real estate investor should know:
Not Every One of Them Is Legit
There are a lot of loan scams in the hard money space so be wary of fake lenders who don’t have the ability to do a deal. Most of them are just collecting upfront fees from borrowers!
Protect yourself by reading this post: How To Avoid Lending Scams
Don’t Assume a Hard Money Loan is Like a Bank Loan
The process of obtaining a hard money loan is completely different from the home mortgage loan process that is typical at your bank or credit union. For example: documentation requirements, valuation determination, speed of funding. These are just three examples of how the process differs greatly between the two types of lenders.
Never Expect No Documentation Just Because it’s a Hard Money Loan
So many people assume that just because it’s a hard money loan that there are absolutely no documents required, e.g. loan application, credit report. Although the documentation requirements of a hard money lender may be LESS than a bank lender for a loan approval, it does not mean they are non existent. Each lender has its own list of documentation requirements, so ask and don’t expect or assume that there’s no documentation required.
These are just 3 important things that every real estate investor should know about hard money lenders. Are you a hard money lender yourself, or are you a borrower who is seeking private money financing? What else would you add to this list?
Both real estate investors and small business owners are two groups that commonly utilize private money lenders. A private money loan is any loan from a non-bank source of financing. Most auto financing falls under the category of private money loans, just like hard money loans used in real estate investing. Because these loans can fund much faster than traditional financing, they allow individuals to capitalize on opportunities or to solve problems. But why should you know a few private money lenders? Below are just a handful of the reasons why you should have a few private money lenders in your digital rolodex:
1. Bad Credit Nightmares: a foreclosure, bankruptcy, or other credit issue can really limit an individual’s ability to borrow money. Most private money lenders don’t care about credit, and will lend to you anyway. If you have bad credit, knowing a few private money lenders is a must. You never know what opportunity could come along for which you’ll need financing.
2. Fast Real Estate Acquisitions: Good real estate deals are typically done very quickly, with all cash, and don’t wait for bank financing. But because private money lenders can make quick lending decisions, hard money loans can work like ‘all cash,’ because of their rapidity of funding.
3. Inventory or equipment purchases for business: Small business owners are often unable to obtain credit lines. Private money lenders will step up to provide credit to small business owners when banks will not. The availability of this type of credit can be life or death to a small business.
4. Buy Outs: Whether it’s a partner, family member, or business entity you are looking to buy out of an investment, a private money loan is a great alternative to complete a buy-out. Often it is cheaper to pay interest on a loan, rather than keep a bad partner in an investment. Private money loans are commonly used for this purpose.
5. Repairs to real estate owned: Many banks won’t lend money for repairs, improvements, or for additions to real property. Private money lenders, on the other hand, will make loans for repairs, improvements, and will also lend on vacant, distressed properties.
These are just a few of the reasons you could find yourself needing a private money lender sometime in the near future. By making relationships with non-bank lenders, you can create opportunities for yourself or provide solutions to problems. For more information on our private money loans, take a look at our loan program page and keep our contact information in your rolodex!