Hard money loans do not deserve the seedy, or even criminal, reputation they have gained in the popular imagination. Though not ideal for all situations, they can provide specific advantages and are certainly not inherently predatory.
There are a variety of common, if unexpected, situations that may require a business or individual to pursue timely financial liquidity. Hard money loans, like any other borrowing method, have pros and cons. The key is to be well-informed of all your options so that you can choose that which will best address your needs. Ted Przybylek (ranchoted.com), a San Diego area lender, has years of experience with hard money loans. In the video above he relates the experience of a friend who, in the midst of a transaction, was unable to get to clear his loan due to deposits that were deemed unacceptable. With only 14 days left to close the deal, Ted’s organization was able to intervene and provide a hard money loan. Though they can certainly be a life-saver, it is important to realize that this process, like any other, must be conducted properly to avoid serious consequences.
There is a persistent belief that hard money loans are necessarily sub-prime, which naturally elicits anxiety in potential borrowers. That assumption is meritless; rather, they are high collateral loans. This simply means the recipient must own sufficient real property to back the loan. Generally speaking, hard money loans can equal roughly 65% of available collateral. For example, a million dollar property could back a hard money loan of about 650 thousand dollars. This arrangement provides the lender with a high degree of protection, which in turn helps the borrower with correspondingly low interest rates and the possibility of refinance later in the life of the loan. Mr. Przybylek has arranged loans with interest rates as low as 8%.
The following are three situations where one might consider a hard money loan:
As an investor: Though flipping real estate can be extremely profitable, by its nature it opens an investor to the risk of many unexpected issues. These problems can be mitigated through bridge financing, which provides temporary capital while the investor’s funds are tied up elsewhere.
As a business owner: Business expenses such as primary loan payments, payroll, stocking, etc. can create a climate where income varies widely from month to month. A hard money loan can stabilize a business’ access to capital.
As a private borrower: Unfortunately, the need for an average borrower to pursue a hard money loan tends to stem from their being taken advantage of by another lender. Unscrupulous lenders may issue a predatory loan intending to seize the borrower’s assets and a hard money loan may allow the borrower to avoid this.
Hard loans may be the best remedy to a difficult situation. Before such a major step it is always advisable to ply one’s personal network for less financing options with lower stakes. It is always better to avoid such situations in the first place and when in doubt you should always seek legal counsel before signing a potential dangerous loan.