Hard money lending – what is it – who does it – how does it work?

The commercial real estate market is beginning to show signs of making a comeback, but banks are still hobbled by the Federal regulations that make getting loans on commercial real estate difficult.  Many savvy investors are looking into private capital funding for their commercial real estate loans.  This funding, also commonly called “hard money,” is not well understood.  Let’s look at some of the most common questions that borrowers have about this type of lending:

1. Is a hard money loan safe?
2. How does hard money pricing compare to banks?
3. How do hard money lenders “requirements” differ from intuitional lender?
4. How can a borrower find a reliable hard money lender?
5. What are the dangers and what are the advantages to hard money loans?

Are hard money loans safe?

Most of the time, they are.  Sometimes they are not.  Our clients often say the same thing about their bank loans:  some banks are great to work with while others can be a nightmare.

Hard money lenders (let’s call them from now on “private money lenders” since that is really what they are) underwrite loan requests very differently that banks or life insurance companies, but their documentation and servicing of loans is quite similar.  If the borrower pays as agreed there should be no unusual problems with a private money loan. If a borrower defaults than private money lender at some point will have to foreclose. With that said, private money lenders are smaller and more flexible than institutional lenders. It may be easier for a borrower to communicate with their lender and work out a solution short of foreclosure.

How does private money pricing compare with bank rates?

These loan rates are always more expensive than institutional rates.  Bank loans on commercial real estate (if you can get one) may fall between 3.5% and 6%.  Private money loans typically range from 9% to 12%.  Some lenders may charge significantly more, but a careful borrower who does their homework should be able to find a lender whose rates will not exceed the rates given above.  Banks typically charge a 1% “loan origination fee” while private money lenders charge between 2% to 4%.

The question a commercial borrower of private capital needs to answer is:  “I can’t get my loan request funded by my bank.  Is paying a higher rate for a short period and getting the deal done worth paying the higher rates?  Remember, private money loans are short term – 1 to 3 years – so the higher rates are not going to be for the long haul.

Part two of this blog will address the three remaining questions.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.