What is “Hard Money”?

“Hard money” is a term applied to real estate loans obtained from a private capital lender as opposed to a bank or institutional lender such as a life insurance company or pension fund.  The name originally derived from the fact that private lenders were willing to look at loans that had complications and were more difficult (or “hard’) to do than normal real estate loans that banks fund.  Sometimes this difficulty is called “hair” as in this loan has a lot of hair to it.

In 2011, with the break down in the financial system, hard money loans are becoming more common as banks are increasingly paralyzed by lack of capital and governmental regulations.  This shift in sources of funding is sometimes referred to as the “Shadow Banking System” and the underlying term for this type of underwriting is “Asset Based Lending”.  Hedge funds are becoming a significant source of capital for these types of loans.

How does hard money benefit a borrower?

Private capital lenders can make a decision quickly – generally in a few days as opposed to banks that can take a few months.  They can fund quickly – sometimes in just a couple of weeks – again far more quickly than banks.  Hard money lenders typically ask for significantly less documentation than banks and they are often willing to overlook issues that would kill the deal for a bank.  Issues such as lack of significant cash liquidity or lack of guarantors with strong financial statements can kill a loan with a bank but the same deal may be funded by a private capital lender.

What are the downsides to a hard money loan?

The primary disadvantage to a private capital loan is that they are always more expensive than bank or institutional real estate financing.  Interest rates are higher – they can range from 9% up as high as 15% depending on the lender as opposed to typical bank rates in the 6% range (with life companies sometimes funding loans as low as 5%).  Loan fees for a bank are generally around 0.50% to 2.0% while hard money lenders may charge between 2% to as much as 5% or more as a front end fee.  Hard money loans are also funded for shorter terms than institutional loans.  A typical hard money loan term could be anywhere from 6 months up to 3 years while banks can fund up to 5 years and life companies can fund 15 to 30 year terms.

What are the risks to a borrower?

With the right hard money lender the risks can be managed.  With the wrong one the risks are high – ranging from being taken in by a fraudulent lender and losing up-front fees without getting a loan to ending up in foreclosure without appropriate reasons.  Doing up front research on a private capital lender is critical.

How do I find a hard money lender?

The best way to find a good private capital lender is by referral from a trusted source such as a banker or attorney.  The more common way is to search the internet for “hard money lenders”.  It is always better to try to find a lender in your area – so type in “hard money lenders Colorado”  –  if this is where your property is located – for example as opposed to just “hard money lenders” in order to locate a local lender.  Many large national companies are offering loans but they are much harder to check out than companies in your own geographical area.  See my earlier posting “Borrower Beware – 6 Ways Not To Get Ripped Off By A Hard Money Lender”.

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.