You may have heard the term Hard Money used when talking about real estate loans. So what is it? Hard Money, also known as Private Money, is a term used to describe loans that are made by private individuals or entities. They are used frequently in California real estate transactions.
Private money differs from conventional loans in that private money, or hard money, is based solely on the property‘s collateral. That is why it is commonly found that these loans are written way beneath the actual value of the property concerned. Basically, the investor wants to ascertain that the available equity would be enough to cover any loss or default by the borrower.
Often times hard money loans are from private investors. But, they can also be from private institutions and entities.
You may have wondered if private money is the right solution for you. There are many variables that make up this answer. First, you should always try conventional sources of money first. These would include national banks, regional banks and credit unions. These channels will offer the most competitive pricing and terms to your average borrower.
But, you may find that a normal bank does not wish to finance your transaction in which case you can then look into whether or not you qualify for a private money loan. To be able to take advantage of this option you will need equity in the transaction as well as the ability to repay the loan at two or three times the amount you borrowed in interest and other fees.
At this point you may be wondering why anyone would want utilize hard money. The reality is that there is a time and place where this type of loan makes sense. Some of the reasons could include:
If you require cash in order to buy property.
You have to renovate a property to sell.
You are in a small escrow and need to buy quickly.
For financial reasons you need to access the equity in your property.
You have a bridge loan that needs an extension.
You have approached the banks but they have refused you financing because you own many properties.
You have a unique property and a bank will not lend on it.
You are in a strong equity position and you are able to repay the loan but due to a negative credit record the banks have turned you down.
You need temporary cash flow for a business.
Like most things in life, there are advantages and disadvantages of private money. Hard money is typically expensive and has shorter terms than most bank loans. But, the speed and flexibility in which these loans can be done is extremely valuable. It can be a useful tool for some borrowers’ California real estate loan needs.
Hard money is not hard at all! Unlike a bank loan which can take a while to process, hard money loans usually do not take that long. But, because of the attached fees and the terms and conditions some people feel that it is not a worthwhile option to consider. Although not everyone will find it the right solution for their needs, hard money is often the right way to go for many others.