Pros and Cons of Alternative Lending
Disadvantages of Hard Money
- Fees – Both borrowers and investors in the hard money arena are often overzealous. Borrowers coming in with the wrong expectations can easily fall prey to unscrupulous lenders. One of the biggest red flags that a borrower can encounter is a large upfront fee. Many hard money lenders take minimal or no fees upfront. If your lender is asking more than an appraisal fee or an inspection fee you should run. Borrowers often approach me requesting 5-6 figure short term loans to pay fraudulent upfront fees to other lenders. If I were a borrower, I would never pay these fees because those lenders are likely to run off with my money.
I recently encountered a similar scenario. Don was an investor who was seeking a $500,000.00 loan from us. His collateral was 10 acres of beach property in a spectacular area. After further investigation, it was discovered that Don was using $400,000.00 of this loan for an upfront fee to be paid to a loan broker of questionable character. I refused the loan as I was confident his funds were to be stolen.
- Rates – Most hard money lenders have a niche they cater to. Some are fast and expensive, some work with fix and flips, apartments, and others focus on land. Each one has its expertise, loan range, and parameters. The trick is to find the hard money lender that fits your project for the right price. Be warned hard money can be expensive so borrowers’ projects will need to keep up with the interest and fees. Making the right deal can facilitate healthy returns.
Kent was a developer who was financially devastated in the 2008 real estate crash. He was knowledgeable about land acquisitions and development. Kent had tied up 20 acres in the west coast and had not been able to find a lender to fund a $1,000,000.00 purchase price. He called me 2 days before his purchase offer expired. We liked the land and made that loan in two days. Kent sold that land 30 days later for $2,000,000.00. Remember that hard money used the right way works out for all parties.
- Premature Foreclosure – There are many hard money lenders in the loan to own game. In other words, the lender makes the loan to foreclose and own the property. Every hard money lender I know is prepared to foreclose to protect their interests, but some make that loan only to take over the property.
While it can be very profitable for the lender, it is a morally gray area and sometimes illegal. Because of this, as a borrower, it’s very important to make sure your investment makes economic sense. If you can’t pay it back, don’t take it out.
Benefits of Hard Money Lending
- Speed – Without a doubt, many borrowers need money quickly, whether it’s because of expiring deadlines, looming foreclosures, or great business opportunities that need to be closed ASAP. A typical bank loan can take anywhere from 30 days to 6 months to close, and a borrower may get rejected at the finish line. Speed is probably the greatest benefit to the hard money borrower.
- Overcoming the “Big Three”: Credit, Cash and Income – As we all know banks require the big three. You must have good credit, cash reserves and a proven history of income. Hard money looks at it to some degree but most often makes the loan despite deficiencies in the big three. Our focus is the fourth piece of the pie: equity. Equity is the main ingredient of the hard money loan, and if you have it, you most likely can get your loan.
- Creativity – The greatest benefit the hard money lender can give the borrower is creativity. Alternative lending provides the vehicle to grant loans that fall outside of a typical business loan. I have made many no money down loans to purchasers, where the seller carries back in second positions. I have purchased notes and restructured where borrowers had 2nd 3rd and 4th liens. I have acquired judgments at discounts and released as part of a loan process. I have negotiated with the IRS to get loans done. Would banks do that? No, but an experienced hard money lender will.
Think a hard money lender can best serve your loan needs? Apply here.