It is not uncommon to hear mortgage industry insiders refer to hard money banks as a final resort. While this might be true to the extent that many borrowers who solicit loans from hard money banks do so as a final resort, there are several cases in which a hard money lender may be sought before a traditional banking institution. Let's have a look at some scenarios where a hard funds provider might be a first stop instead of a last resort.
COMMERCIAL Real Estate DEVELOPMENT
Let's say a property developer has sunk $10 million into a development deal and first planned to sell units in January and would then start to get back their investments dollars from the project. As is the case with lots of such endeavors, delays may push back the start sales date or the project may go over budget, leaving the developer with a cash negative position. The developer now must take out a bridge loan in order to get through his money poor period so as to "survive" till the project starts to realize a cash positive position. With a conventional loan, the bank would not push through the loan for the borrower for 4 to 6 weeks. The developer would default on his original loan or would not have money on hand to finish up the project. The developer desires money now and often requires the cash for only a two to four month period. In this eventuality, a hard bank would be the ideal partner because they are able to provide a loan swiftly and effectively.
REHAB Financier
Another example of a tough money eventuality is a rehab investor who wants a loan to renovate run down homes that are non-owner occupied. Most banks would run from this loan because they'd be unable to verify the rehabber is going to be able to directly sell the units for a reasonable profit รข€" especially with no current tenants to provide rent to deal with the mortgage. The hard bank would, in all likelihood, be the only lender content to take on such a project.
FLIPPING PROPERTIES
Another group who may use hard cash banks as a starting point in contrast to a last resort are investors in property looking to "flip properties." If a stockholder locates a property that they deem to be an incredible value, they might need quick and secure financing to take buy, renovate and sell the property quickly. Any person looking to flip real estate doesn't want to cling on to the property for a lengthy period and the near term loan from a hard bank will accommodate this need. The loan may be structured as interest only, keeping the costs low. Once the property is sold by the individual who is flipping the property, the principal is paid back and the profit is kept or reinvested into the next project.
A BORROWER IN FORECLOSURE
One last scenario of hard money involves someone who finds themselves in foreclosure. Once a homeowner falls behind on their place payments, most banks won't supply them with a loan or restructure their present loan. Occasionally, someone that is looking at repossession will obtain a hard cash loan to avoid foreclosure proceedings and use this time to sell the property.
The question remains why would funds provider loan money if a normal bank wouldn't even consider such a bet. The answer's two fold. The 1st is that tough money banks charge higher rates than traditional lending establishments. The second is that hard money lenders require the borrower to have at least 25-30% equity in real-estate as collateral. This insures that if the borrower goes into default on their loan that the lender can still regain their original investment.
A hard money loan is to all intents and purposes a wedding between a borrower in a tough spot (either from a time delicate perspective or due to their poor financials) and a bank who is risk adverse and is willing to take a big gamble for a higher return. While hard money loans may be a last resort for many , there are a great many eventualities when hard money is the only way to go.
COMMERCIAL Real Estate DEVELOPMENT
Let's say a property developer has sunk $10 million into a development deal and first planned to sell units in January and would then start to get back their investments dollars from the project. As is the case with lots of such endeavors, delays may push back the start sales date or the project may go over budget, leaving the developer with a cash negative position. The developer now must take out a bridge loan in order to get through his money poor period so as to "survive" till the project starts to realize a cash positive position. With a conventional loan, the bank would not push through the loan for the borrower for 4 to 6 weeks. The developer would default on his original loan or would not have money on hand to finish up the project. The developer desires money now and often requires the cash for only a two to four month period. In this eventuality, a hard bank would be the ideal partner because they are able to provide a loan swiftly and effectively.
REHAB Financier
Another example of a tough money eventuality is a rehab investor who wants a loan to renovate run down homes that are non-owner occupied. Most banks would run from this loan because they'd be unable to verify the rehabber is going to be able to directly sell the units for a reasonable profit รข€" especially with no current tenants to provide rent to deal with the mortgage. The hard bank would, in all likelihood, be the only lender content to take on such a project.
FLIPPING PROPERTIES
Another group who may use hard cash banks as a starting point in contrast to a last resort are investors in property looking to "flip properties." If a stockholder locates a property that they deem to be an incredible value, they might need quick and secure financing to take buy, renovate and sell the property quickly. Any person looking to flip real estate doesn't want to cling on to the property for a lengthy period and the near term loan from a hard bank will accommodate this need. The loan may be structured as interest only, keeping the costs low. Once the property is sold by the individual who is flipping the property, the principal is paid back and the profit is kept or reinvested into the next project.
A BORROWER IN FORECLOSURE
One last scenario of hard money involves someone who finds themselves in foreclosure. Once a homeowner falls behind on their place payments, most banks won't supply them with a loan or restructure their present loan. Occasionally, someone that is looking at repossession will obtain a hard cash loan to avoid foreclosure proceedings and use this time to sell the property.
The question remains why would funds provider loan money if a normal bank wouldn't even consider such a bet. The answer's two fold. The 1st is that tough money banks charge higher rates than traditional lending establishments. The second is that hard money lenders require the borrower to have at least 25-30% equity in real-estate as collateral. This insures that if the borrower goes into default on their loan that the lender can still regain their original investment.
A hard money loan is to all intents and purposes a wedding between a borrower in a tough spot (either from a time delicate perspective or due to their poor financials) and a bank who is risk adverse and is willing to take a big gamble for a higher return. While hard money loans may be a last resort for many , there are a great many eventualities when hard money is the only way to go.
About the Author:
Tim Kelly is a guru in finance having completed his LLM in Finance from Institute for Law and Finance at Frankfurt University. To Find line of credit , easy company loan, 24hr loan in singapore
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