Hard Money Loans

Hard Money Loans

Hard Money Loans or Hard Money Lending is one of the top five ways to finance Real Estate. It isn’t the only way or even the best in all situations. It works because it can make both parties money.

Once you have joined a Real Estate Investors Association like Illinois REIA the second lender you will meet after a bank officer will probably be someone offering Hard Money Loans.

Please don’t confuse a Hard Money Loan with Hard Money raised by political campaigns. These are two entirely different concepts with totally different results.

What is a hard money loan?

A hard money loan is simply a short-term loan secured by real estate. Hard money loans are funded by private investors.  The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years.

What is the interest rate on a hard money loan?

Hard money lenders will charge anywhere from 2 to 10 points. This equals 2 to 10 percent of the loan amount as a loan origination fee. For those used to bank loans with lower interest rates, this loan fee charged by a hard money lender can have a little “sticker shock.”

Funding by hard money loan is most popular among real estate investors whose aim is to develop or renovate property for sale. A Hard Money Loan is issued by a private lender. The private lenders main concern is the current value compared to the after repair value (ARV) of a property.

What does a Hard Money Lender Want:

Hard Money lenders want Valuable collateral securing the loan.  If the collateral is good they are less concerned about your ability to repay. Default on the loan and a hard money lender will get their money back by taking the collateral and selling it. The sales value of the collateral is more important than your financial position.

Hard money loans are generally short-term loans, lasting from one to five years. You wouldn’t want to keep them much longer than that anyway, because interest rates for hard money are generally higher than they are for traditional loans.

Hard Money Pros:

  • Loan value equals property value
  • Short term repayment periods (6-36 months)
  • Higher than usual interest rates sometimes up to 15%
  • Bigger fee/ loan points to obtain a loan
  • No credit worthiness requirements
  • Funding is available on short notice
  • A hard money loan eliminates “most” of the red tape for borrowing.
  • Convenience and flexibility of terms can be great.

Hard Money Cons:

  • Limited repayment time
  • Costs

Illinois Land Trust as Security, A variation on Hard Money Lending

Example: The borrower has no collateral, down payment or anything to help them get a traditional loan. The lender is averse to making a private party loan and taking a mortgage and being faced with the possibility of being forced to file a foreclosure. They ask me to serve as Trustee of an Illinois Land Trust.

The choice of trustee was made because each party to the purchase knows me, but did not know each other. The Trust protects the Hard Money lender in case the borrower defaults. The trust lists the lender as the beneficial interest of the trust.  The Trust also protects the borrower from adverse possession by the lender. After the terms of the Hard Money Loan are completed 100% of the beneficial interest will be transferred to the borrower.

Should the borrower default, the lender already owns a beneficial interest in the real estate. No legal action other than a possible eviction is required. No need to foreclose on a loan. Just evict the occupant. The borrower must fulfill the terms of the Hard Money Agreement to receive an equitable position.

When the borrower fulfills the terms of the Hard Money Loan Agreement I am instructed to transfer the beneficial interest to them or when the property is sold to disburse the funds as outlined in the trust agreement at closing.

Final Thoughts on Hard Money Loans

In addition to Hard Money Loans you should also consider Asset Based Lending, Crowd Funding, Bank Loans and Equity Partnerships for your borrowing needs.

Remember, don’t give up on your deal. Just try another lender or type of lending.

Good Luck and Good Investing!

George Skidis

President and Founder of Illinois REIA

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