Most of the times real estate investors need quick financing to close their deal’s, they use private loans in order to avoid missing out on the real estate deal. Private loans, often referred to as hard money loans or bridge loans, offer significant advantages over conventional or bank-financing arrangements. Hard money loans fund quickly within a flexible structure and without prepayment penalties that can unintentionally hinder the success of your real estate business.
Hard money is a type of short-term loan secured by real estate. The loan terms are generally around 12 months, but longer terms of up to 5 years are available in some situations. You can get loan based on the value of the property being used as collateral. Although you get up to 75% of the value of the property. This ratio of the loan amount to the value of the property is commonly referred to as the LTV (loan to value). The main benefit of hard money loans over traditional lenders like banks is the ability to quickly approve the borrower and fund the loan. Hard money loans approve and fund faster than it takes the bank to realize they have a new loan application! Hard money loans are collateral-based, the application process focuses less on the borrower’s income, credit scores, or issues like recent foreclosures, short-sales or bankruptcies. When the banks are all saying “No”, hard money lenders can still say “Yes”. You can apply for hard money loans for any type of property including single-family residence, multi-family residence, land, industrial and commercial.
Now after a quick overview of hard money loans, here are 6 big advantages that real estate investors are able to benefit from when using hard money.
- Fast funding so deals aren’t missed out on: Many properties, especially distressed properties, need to be put under contract and closed quickly. Fast funding helps investors to avoid missing out on the deal. Hard money loans generally fund into 5-10 days, but if there is a very urgent need to get the funds sooner the hard money lender able to finance the deal even quicker.
- Negotiating lower purchase prices or other beneficial terms: A property owner who needs to sell their property quickly will be more likely to negotiate with a buyer who can offer a quick close. This puts an investor into a position of power when they offer a quick close with a hard money loan. This can help the investor with negotiating a lower purchase price or other favorable terms.
- Getting an offer accepted over competing bids: An offer on a property with hard money financing is stronger and increases the likelihood of being accepted when compared to an offer with traditional bank financing. An experienced seller (or experienced agent representing the seller) understands that hard money lenders are able to fund quickly and much less likely to encounter a last minute issue that would prevent them from funding the loan during escrow. Banks have a bad reputation for sometimes stumbling across some small detail about the deal that causes them not fund the loan.
- Using leverage in order to do more deals: Paying cash is a great strategy for getting an offer accepted at a better price and saving on lending costs. But paying all cash has its drawbacks as well. If too much of an investor’s cash is tied up in one or two deals, they risk not being able to pull the trigger on a new opportunity that arises while the other deals are in progress. An offer with hard money loan allows an investor to provide a better offer than traditional financing while still keeping enough cash on hand to act on an opportunity that may be around the corner.\
- Pulling equity from existing properties to put it to work elsewhere: While having a high amount of equity in a property is positive thing, that money may be able to get higher returns if reinvested in a different project. A hard money lender can quickly process a hard money cash out loan for an investor. The funds can then be reinvested as a down payment on a new purchase or used to improve an existing property.
- Obtaining financing when at the max for conventional loans: Many banks allow an investor to have only four financed properties. Hard money lenders do not have these types of arbitrary restrictions. The hard money lender will be able to provide funding regardless of the amount of financed properties an investor has. The hard money lender will primarily be concerned with the amount of equity the investor will have in the new subject property.
Conclusion
Hard money loans have a lot to offer real estate investors who can’t afford to miss out on deals due to slow financing. Hard money really shines in the areas where the bank loans fail miserably, speed of funding and flexibility.
Magna Capital Group, Inc. is a hard money lender in Los Angeles, California with over 30 years of experience. For more information about our loan programs or to inquire about a loan call (323) 655-6888 or email at info@magnaenter.com.
