If there is a funding vehicle perfect for real estate investments, it would have to be hard money. Investors can take advantage of hard money loans with features that are just not available through traditional financing. Knowing what I know about hard money, it is no surprise to me that real estate investors love it.
An Undeserved Bad Reputation
In my opinion, hard money lending has an undeserved bad reputation. Hard money loans are often described as loans of last resort made to desperate people who do not qualify for conventional financing. Nothing could be further from the truth.
For a lot of property investors, hard money is a first choice. Investors choose hard money because it is faster than traditional financing. It is also more flexible in terms of rates, repayment terms, and fees. Hard money lenders have the ability to customize loans as circumstances demand while traditional lenders tend to be locked into a strict set of lending rules that are completely inflexible.
Funding Arranged Quickly
I am guessing the most attractive feature of hard money, at least to real estate investors, is speed. Put another way, hard money funding can be arranged quickly. How quickly? That depends on the lender and its normal operating procedures.
Actium Partners is a Utah hard money firm based in Salt Lake City. They have been known to fund loans in as little as one business day when circumstances warrant. They once had a client call them on Friday morning with an emergency need for funding by the following Monday morning. Actium approved and underwrote the loan that afternoon. Funds and documents were sent to the title company on Monday morning.
Minimal Documentation Requirements
Real estate investors also appreciate the minimal documentation requirements associated with hard money loans. Hard money lenders do not have to turn up every stone and look around every corner to check a borrower’s creditworthiness. Typically, the only document requirements are those pertaining to the property being acquired.
Rare is the scenario in which a hard money lender contacts a borrower three or four times looking for more documents. Borrowers are not sent on a wild goose chase trying to produce documents they don’t normally keep on hand.
Conversely, a bank might request P&L statements, tax records, and even proof of income. Everything they need to determine creditworthiness must be verified by documents. Because hard money lenders do not look at creditworthiness, they don’t need nearly as much documentation.
Asset-based Approval
At this point, you might be wondering how hard money lenders go about approving loans. In the absence of determining a borrower’s creditworthiness, they need something else to look at. That something else is the property being acquired. It is an asset with value. Its value is the single most important factor in determining approval.
A firm like Actium Partners needs to know that the property being acquired has enough value to cover the amount of the loan. A little extra is built in to cover the lender’s costs and hedge against a potential loss in property value before the loan is paid off. But as long as the value is there, Actium can usually find a way to approve a loan. The firm does not need to see W2s, business records, P&L statements, etc.
I cannot say that hard money was developed to serve the real estate market. But I do know that hard money and real estate investing work extremely well together. Hard money is perfectly suited to the needs of a real estate investor who wants to avoid traditional financing.
