Hard Money is Not As Hard As It Used to Be
Nontraditional lenders do deals that banks won’t, or can’t
Once upon a time, “hard money” or private capital lending evoked imagery of potentially unsavory lenders
congregating in back alleys, making loans to borrowers that simply had to be paid back – or else!
Fortunately, times have changed and markets have become far more efficient, with private capital or “hard money”
lending evolving into being simply another arrow in the capable commercial mortgage broker’s quiver of
potentially suitable financing sources, each presenting their own pros and cons.
One pro of hard money
lenders is that they typically focus far more upon the value of the collateral proposed,
and far less upon a borrower’s credit history, adequate financial statements
and the like. Yet another is that, while
a borrower’s cost-of-capital from a hard-money lender is invariably somewhat
higher than with a conventional one, the hard-money lender can typically
perform far more quickly and with less “red tape” than traditional lenders,
such as banks.
As hard money lenders generally
focus more upon the amount of equity borrowers have in the proposed collateral,
they can and often do overlook a borrower’s imperfect credit profile or prior “missteps”
for those borrowers who demonstrate not only sufficient “skin in the game”, but
an ability to service the loan requested.
This is particularly true for the rare borrower/broker which approaches a
lender fully prepared, either armed with a title report, ALTA survey, Phase I
environmental assessment and trustworthy appraisal already in hand, or at least
fully mindful of most lenders need for such reports.
Hard-money loans can be particularly
useful for borrowers owning or seeking to purchase smaller owner/user or
special-use properties, as such properties typically lack either the particular
characteristics, or enough critical mass, to garner sufficient bank attention. Some private lenders also
dispense with traditional
conservative lending practices by, for example, foregoing a borrower’s personal
guarantee of the underlying indebtedness, opting instead to focus their
recovery efforts upon the asset itself.
Reputable, direct lenders
While borrowers and brokers
need to be wary of any financier offering unclear lending parameters, or those with
high up-front fees, most reputable private lenders can and will now provide a
loan approval letter within days, not weeks, delineating not only the proposed loan
terms and fees, but also the refundability of any up-front deposits required. Some of these are likely to
lenders, deploying their own funds, with an established history of conducting
business and treating all parties equitably.
Working with a direct private
lender can provide numerous other advantages to the savvy mortgage broker,
including the ability to commit to and fund deals quickly, since direct lenders
make their own funding decisions, fund with their own capital, require no
outside approvals, and typically retain and service all loans funded in-house. Some direct lenders even
allow their most
experienced brokers to “table-fund”, and thus originate, process and close
loans in the broker’s own name, with all loan documents simply assigned at the
closing (table) to such lender.
As with all things, there are
few free lunches. Beyond the higher
rates and fees that private capital lenders invariably charge, many such
lenders can or will only lend for shorter terms (typically, 2 years at most),
thereby requiring that borrowers refinance or otherwise monetize the property,
perhaps at a sub-optimal time to do so. Other
private lenders follow an alternative business model, however, and instead offer
borrowers 5-10, sometimes 15-year maturities.
For borrowers considering
an investment with considerable upside potential, the somewhat greater
cost-of-capital presented by so-called “hard money” lenders is frequently
offset by a direct lender’s speed of execution and flexibility in structuring
and documenting the loan.
is particularly true with respect to value-added real estate opportunities,
where a borrower acquires an underperforming asset, fixes it up and corrects
any deferred maintenance, thus rendering the property both attractive and
“turnkey” for an owner or user alike.
While such a borrower will then need to decide whether to “flip” the
property, or to hold it for a longer term, the significant value created by the
borrower quickly acquiring control of the property and then deciding how to
reposition it, is generally far more significant than the slightly higher cost
of capital posed by the private loan.
Private capital or “hard money” loans are thought of as loans of last resort, but the modern commercial mortgage
broker simply recognizes them as yet another tool in an ever-evolving toolbox. Properly utilized, they can
make the difference between those real estate opportunities which become realities, vs. those that don’t, and
can cement your relationship with your borrower for years to come.
This article originally appeared in Scotsman Guide