You hear the term all the time, but most people don?t know exactly what a ?hard money? loan is. The truth of the matter, is that a bit of time should be invested in understanding this unique loan type since it is an effective tool in a broker?s arsenal of possible commercial lending types. Brokers that have a strong relationship with a hard money lender simply make themselves available to assist their clients and earn a fee that they ordinarily would not. But what exactly is a hard money loan? Let?s look at the attributes of this loan, review some examples of how and why it?s used and further explore how lenders make these unique loans happen. Why Hard Money? A hard money loan is most easily recognized by its distinguishing characteristics including a low loan to value, high rates and high fees. But it is best known for its ability to close quickly; often times hard money loans can move from start to close in 30 short days. So, why would someone need to close a loan in 30 days? It turns out there are many reasons that a quick turn around might be necessary. For instance, consider a woman who is aware of a piece of available property that is near the site of a soon-to-be-built shopping center. The land owner will sell the property at a lower cost, but only if the deal can close in the next 30 days. If the borrower were to go the traditional borrowing route, closing would take 60 to 90 days meaning she would lose the opportunity to secure the land at the reduced rate. By securing a hard money loan, the borrower will pay higher rates and fees, but can close quickly knowing that she will earn a significant return in a year when the shopping center?s construction is complete and the land?s value has increased. Despite the high fees and rates, a hard money loan might be the only choice to help borrowers out of a sticky spot. For example, consider the individual who?s lender is about to foreclose on his property unless he can repay a certain amount within a short time period. The property is worth $10 million and the borrower owes $1 million against it. If the property is foreclosed upon, all of the property?s equity will be lost. Although a hard money loan carries high fees and rates, it enables the borrower to meet the aggressive repayment timeframe and save the equity in the property. How Hard Money Works A lender that specializes in hard money loans is equipped to handle the expedited closings of 30 days or less, which makes them unique in the lending space. These firms do so by preparing themselves with all of the necessary underwriting resources (attorneys, appraisers, etc.) to review and approve a loan very quickly. Hard money lenders employ a lower loan to value ratio than a traditional lender might. For instance, a commercial loan to value might range from 70 to 95 percent. A hard money lender, however, will lend at no more than 50 percent loan to value, which allows the firm to recover its investment should the need arise. Also, most times a hard money lender will skip traditional underwriting steps, such as evaluating a borrower?s credit rating or examining his experience level, as a means to progress the loan more quickly. One step the hard money lender will never skip is a water tight appraisal of the property. By ensuring the property?s value in advance of making a loan, the lender can tolerate the high risk it takes because it can liquidate the asset for enough money to recover the loan if necessary. Just as important as a rock solid appraisal is an appropriate exit strategy. If a borrower can not share how the loan will be repaid, in reasonable terms, a lender will not make the deal. There is a derogatory expression that hard money lenders are ?loan to own? lenders, meaning that they would be happy to take possession of a property because they can get it at such a low cost. This is the last thing that a hard money lender wants. Taking over a property and trying to manage it while they want to sell it is not what the lender is in business to do. Foreclosure, therefore, is not a suitable exit strategy for a hard money lender. No Pre-payment Penalties It?s important for a broker?s client to understand that a typical hard money loan does not have a pre-payment penalty associated with it. So, if the borrower is in a position to repay the loan early the lender will not impose an extra fee. Because the loan fees for a hard money loan are already high, lenders are able to enhance their yield and, therefore, do not need to impose pre-payment fines. Consider this example: A lender makes a loan for $1 million at 14 percent interest and 10 points. The lender collects $100,000 up front. He is only exposed for $900,000 but is collecting a high rate of interest for the full $1 million. Not only did the lender collect a whole year?s worth of interest in the $100,000 paid up front, but his loan is repaid in a short period of time which allows him to loan it out again very quickly and increases his yield for that loan amount. In short, a hard money loan allows the lender to continually re-lend dollars numerous times each year, so there is no need to collect a pre-payment fee. Offering More than Before In the course of a commercial broker?s career, the need for a hard money loan will most definitely arise. By forging a solid relationship with a hard money lender, a broker now has a resource to serve clients in need of a fast-closing loan. Keep in mind that most hard money lenders are broker friendly also. Because their fees and rates are higher than the typical loan, many hard money lenders will actually funnel some of their fees back to the broker. Andrew Bogdanoff has more than 35 years? commercial lending experience and founded Remington Financial Group in 1993. Bogdanoff has served as the company?s president since its inception, and, under his leadership, RFG has closed billions of dollars in transactions. Andy can be reached at [email protected]. For more information on Remington Financial Group, please visit www.Remingtonfg.com
