13 Different Ways to Use a Hard Money Loan
When one thinks of a hard money loan, the most common stereotype is that only someone who is desperate would borrow these funds. I mean, why else would someone pay the high-interest rates associated with hard money loans? Why not go to the bank for a traditional loan? It is actually not for reasons of desperation that a borrower tends to use a hard money loan.
Just because a borrower is inclined to pay the higher interest rates associated with private loans, this does not imply desperation or a “lender of last resort” status. On the contrary, there are countless reasons why a borrower may seek out a hard money lender over a traditional lender. Here’s a list of 13 different ways to use a hard money loan that most people may have never considered:
1. 1031 exchanges: Investors who purchase properties via a 1031 exchange, may be short on funds to close. If the deadline is tight a bank may not make the deadline. Often investors will use a hard money, bridge loan together with 1031 funds to make a purchase.
2. All Cash Purchase and Sale Agreements: Any “all cash” transactions that must close quickly. Hard money lenders can perform very easily on an “all cash” contract.
3. Expiring Contracts: Any buyer under a fading deadline understands how nerve wracking it can be. A fast funding hard money loan is usually a short-term solution to prevent a buyer from losing a contract.
4. Buyouts: Real estate partnerships and business relationships all must come to an end at some point in time. Hard money loans can facilitate buyouts by loaning on real estate so cash is available to buy out partners.
5. Other Business Purposes: Purchases of inventory, materials for filling orders, expansion, tenant improvements, short-term payroll needs. These are all items that business owners can pay for using hard money loans.
6. Bankruptcy Debt Consolidation: A property that is tied up in a bankruptcy can be loaned against, and the funds made available can be used to pay off creditors.
7. Leverage of Unencumbered Assets: Taking loans out on owned assets can make purchases of new assets possible.
8. Short term liquidity until asset is liquidated: Properties that have been inherited or awarded in other legal settlements may require repairs or deferred maintenance, and this requires cash on hand. By taking out a loan against these properties, borrowers are able to have short-term liquidity until they are able to sell the properties or lease them out.
9. Repairs to a property: Many banks won’t lend on properties that are in need of significant repair, but hard money lenders will.
10. Debt consolidation: Repair bills and other debt that has piled up on a property can easily be consolidated into one loan. This can help to lower the monthly debt service in many cases.
11. Short sale, foreclosure, or bankruptcy seasoning issues: A mark on the credit from many years past can prevent someone from obtaining a traditional loan until a certain amount of time has passed. However, hard money lenders will still lend to borrowers with credit issues in their pasts.
12. Loan coming due: Sometimes borrowers wait too long to get loans paid off that may be maturing, or coming due. Deadlines can sneak up, so often borrowers must scramble to pay off a maturing loan with a bridge loan (hard money loan) until they are able to refinance with another bank loan.
13. Vacancy levels exceed bank requirements: Investment properties that are vacant often cannot qualify for bank loans until they are leased up. A hard money lender will lend on a property even if it is vacant.
There are innumerable reasons why a borrower would go in the direction of a hard money loan over a bank loan. Believe it or not, many borrowers of private money could qualify for a bank loan on paper, but choose this type of loan purposely. Many of these borrowers use different types of arbitrage, and for this reason the higher interest rates don’t bother them.
Because we have seen so many different loan scenarios, we understand that it is not the credit score of the borrower that is important, but other factors that weigh in more. Many bank loan underwriters cannot get past a bad credit score to look at the positive factors that could offset the risk in a loan. Often, bank lenders don’t have the kind of flexibility in underwriting that private lenders do, which helps to make “common sense” lending decisions. Hopefully this short article has shed a little light on the many reasons why someone may seek out a private money loan over traditional forms of financing.