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Monday, March 25, 2013

6 Reasons To Consider Hard Money Loans AKA Private Money Loans

A common misnomer about hard money loans is that they are from dubious sources and that is mostly false. Agree, some are but I'm not talking about those ones. I'm talking about private money loans which are not from your traditional financial institutions or mortgage lenders.

Did you know that if you get a mortgage loan from a mortgage broker, that it is likely from a private investor or a private investment fund? Well, many hard money loans and private loans are about the same. Except you deal directly with a portfolio manager.

These private money loans are generally customized to your particular situation and come in a variety of sizes, shapes and conditions and they allow you to get into real estate purchases that you  may not be able to  in traditional mortgage lending.

For example you can get financed now to purchase your next home even if you have had a short sale, a foreclosure or even a bankruptcy, the day after. Or to address other situations customized for your individual needs.

Another example, a common mistake for many real estate investors is that they focus on only one way of putting together a transaction. There are many different strategies and many different financing options.

So knowing when, how and what type of a private money loan will make you a better home buyer and/or investor.

Private money loans are a very common financing option for many home buyers and investors alike, but they also have their time and place.

What is a private money loan anyways?

The easiest way to explain a private or hard money loan is that it is private financing. Private  money lenders are people that have access to a pool of money that they loan out on real estate. This pool is usually the result of a group of investors pooling their money together to finance real estate. They are investing in the financing behind the property rather than the property itself.

Since this is private financing, a private money lender is going to charge higher interest rates for the money. These loans usually charge credit card type interest (6-12%). Because of the high interest, this is not a long-term financing option. Most home buyers and investors use these loans for short-term financing before the real longer more conventional loan as an interim loan.

A good example would be a home buyer who just short sold and would like to get back into the market as market values are appreciating at about 22% per year. So a typical scenario would be a private loan for two years followed by a conventional loan thereafter. In this scenario, the benefits far outweigh the costs significantly. So much so, it makes no sense to do otherwise, or even to rent a property.

Or if you are going to turn around and resell the property, then the interest rate is not a primary factor in whether you’ll do the deal or not. The return on your money is far more important than the interest rate. You are not going to have the loan long enough for the high interest to make a large impact. As long as your profit is still in the deal, it makes sense to use a private money loan.

If you are going to be using a longer term exit strategy like holding the property as a rental, you might use private money to get into the deal, and then refinance the property with a traditional loan. Someone might do this if they are unable to get a traditional lender to finance the purchase.

Private money loans are typically short-term loans. The majority of hard money loans will be 6 months to 5 years (sometimes more) in length. This will give you enough time to do what you need to with the property to make the deal work.

The reason that it is called hard money on a private loan isn’t because it is difficult to obtain. It is often called hard money primarily for three reasons:

1. The higher interest rates can make the loan more costly than other types of financing.

2. Most hard money lenders do not want to exceed 90% of the LTV (Loan To Value) or ARV (After Repair Value) for investors. As the borrower, you have to have some sort of a down payment. You need some skin in the game.

3. Often, the requirements to qualify are low. No credit checks, no income verification, no social security check, no seasoning of down payment, etc...

4. Speed of processing - FAST. The loan process is generally quite fast. So fast that it can be done in days, versus 30 to 45 days for traditional loans.

5. Flexibility. It does not get any more flexible in the mortgage lender business. Almost tailored to your very specific home buying.

6. You can purchase you really want.

The lender is going to give the loan based on the value of the asset (the property) rather than the financial strength of the borrower. The lender is going to be more concerned about the deal than they will be about you as a borrower.

So if you are thinking about buying your next property and you may require a private money loan, I'd be delighted to help you achieve your objectives.

Richard Bazinet - Realty ONE Group - Phoenix Scottsdale Real Estate

5 Reasons To Consider Hard Money Loans AKA Private Money Loans