Hard money loans are designed to be short-term and are typically issued at interest rates much higher than conventional real estate loans. They are almost never made by a commercial bank or other traditional lender. Today’s hard money lenders are usually professional investors who fill a need in the market left open by conventional lenders. In fact, many real estate investors would not be able to operate without their hard money sources.

Because hard money loans are not based on traditional credit guidelines, they are riskier for the investor, which justifies the higher interest rates and points. But for an investor who needs money quickly to close a deal, the cost may be worth it. Another challenge for hard money borrowers is that loans are typically made on 50 to 65 percent of the property’s value. Real estate investors may offer additional property as collateral to obtain a larger loan amount.

Conventional lenders are bound by corporate policy as well as federal and state regulations, so they often don’t have much room to be creative when structuring loans. Hard money lenders pretty much make their own rules. They’ll finance properties conventional lenders won’t touch, including distressed or non-conforming properties. They may or may not require monthly payments and may be willing to structure your repayment plan based on how you expect the property to perform. They set terms that make consumers gasp, but investors know it’s not the cost of the money that counts, it’s the availability and timing of the funds and the overall profitability of the deal.

Finding and working with hard money lenders

Finding hard money lenders is not difficult. You can search for them on the internet—just enter “hard money lender” in any search engine, and you’ll get thousands of results. Of course, not all hard money lenders have websites and many prefer to work only in their local area where they can personally meet with borrowers and see the property. Those lenders will often run ads in local papers, including the real estate section of the daily paper and weekly shoppers. Look in the classifieds under “money to lend” or similar categories. You may also be able to find hard money lenders through a mortgage broker.

It’s a good idea to establish relationships with these funding sources before you need them so you can move quickly when you find a deal. Many hard money lenders started out as real estate investors, so they understand and welcome your preliminary inquiries.

Remember that any given hard money lender does not have unlimited funds. They may have to occasionally turn down a deal they would otherwise do because they don’t have the cash available. That’s why you need multiple hard money lenders in your funding source stable—if one can’t do your deal, you can quickly move on to another.
When you take a deal to a hard money lender, put together a complete presentation that not only shows the complete details of the property and loan proposal, but demonstrates your own professionalism as well. Include a property valuation, financial analysis, market information, photographs, and information about your own experience that will make the lender feel confident you’ll repay the loan. See “Packaging Yourself for a Loan” (Wealth Intelligence Network®, June 2007) for more advice on how to put together a winning loan package.

Finally, before you close on a hard money loan, have a real estate attorney review your loan documents to make sure you are protected and that you can’t lose the property for any reason without the lender using traditional procedures that would require due process and a court judgment.

Finding the right property is important, but it takes money—either your own or someone else’s—to close the deal. In Keys to Creative Real Estate Financing, you’ll learn virtually every real estate financing strategy there is, including working with hard money lenders. For more information about advanced training through Wealth Intelligence Academy, visit www.wiacademy.com.

By Jordan Taylor