What is Hard Money FinancingHere’s what hard money is in the world of real estate finance…

The term “hard money” is sometimes used and while it might sound familiar, hard money may not be what you think it is.

Hard money sounds as if it’s a bad thing, or a financing mechanism that skirts the law. But in fact, when properly used, hard money can be a real estate flipper’s best friend.

Hard money primarily derives its moniker from the fact that when compared to conventional or other forms of private financing, terms for hard money loans are more stringent with regard to rates, fees and down payment requirements. In a word, “hard.”

For example, a hard money investor may require a minimum down payment for a hard money loan at 30 percent or even more depending upon the type and current condition of the property.

A single family home to be purchased as a rental may get more favorable terms compared to the corner gas station.

Interest rates for hard money loans can be in the 12, 13 or 14 percent range, and even higher depending upon the terms the hard money lender requires.

Hard money loans are also made for much shorter terms compared to other loans, with terms as short as 90 days to 2 years being typical.

If hard money loans are in fact so onerous, why do real estate investors seek them out?

Hard money lenders can act quickly. Hard money lenders can finance properties under their own terms without having to comply with conventional lending standards. Hard money lenders can quickly evaluate a transaction and provide funds within a few days instead of a few weeks.

And even though rates for hard money loans are higher than normal, less interest is paid because the loan is typically replaced within a matter of months by traditional financing.

When an investor sees a property that requires work before a bank will place a loan, a hard money loan can provide funds to acquire the property, rehabilitate it and prepare the property for sale. A common example is a home that needs foundation work.

A bank won’t make a loan on a property in such shape until the foundation is repaired, but a hard money lender will not only finance the purchase, but also provide money needed to fix the foundation.

Hard money loans are not for most transactions and yes, they are expensive. But when properly utilized, hard money loans can be a convenient, efficient source of funds to finance your next flip.

Talk soon,
David Slabon