MM Lending has been a “Private, Local Real Estate Investment Lender” since 2005. Are we a “Hard Money Lender”? Well, that’s increasingly the term that new investors (and fix-and-flip seminars) are calling private lending for fix and flip projects. The term “hard money” has a history, and not a good one (as explained further below). It’s just a change of trending terminology. The always-current, practical question remains … when is a hard money loan good for you?
Let’s make hard money simple with this three-part rule of thumb for conditions of a ‘good’ hard money loan in a fix and flip property investment:
Hard Money Loans …
- Are beneficial to fix-and-flip investors when they know what they’re doing.
- Are beneficial to lenders when they know that the borrowers know what they’re doing. (key point)
- Are only beneficial to both lender and borrower when the first two conditions both apply.
The phrasing, “Know what they’re doing,” may sound harsher than intended, because new investors are highly encouraged to invest and succeed. This is just short for saying, “the borrower is making a wise choice of investment property in terms of After-Repair-Value (ARV), understands all costs involved from purchase to sale, has accurately budgeted the rehab time and costs, and has the capability, determination and organizational skills to complete the project on time and budget.” New investors run the highest risk of over-estimating ARV and under-estimating costs, time and work. An experienced and responsible local lender plays an important role in the borrower’s benefit from the loan by evaluating the investment opportunity and offering the loan when the borrower is likely to be successful and happy with the outcome. Even though the lender holds the property against the loan, a “flop” would be stress, time and expense that the lender wants to avoid.
Keep the three-part rule of thumb in mind as we look at the history and meaning of “hard money”.
Current vs. Historical Meaning of the Term “Hard Money”
Since the American Association of Private Lenders (AAPL) has already done a great job of explaining the historical and current meanings of the term in this post, Why Hard Money Has a Bad Name, let’s leave you with that to read, and summarize some key points:
- “Hard Money” Historically …
The term, ‘hard money’ originated in the Great Depression when banks were failing and private investors were offering loans at much higher rates than banks. These loans were secured against the borrowers’ properties as collateral, and too often resulting in the lenders foreclosing on the properties … taking the homes of the borrowers in hard times. So, “hard money” could have referred to anything from hard cash to hard times, or using hard assets as collateral, hard to pay back, or hard results of foreclosures.Rule of Thumb Test: Were the loans ideal for the borrowers when the lenders knew they weren’t ideal for the borrowers? No, the lenders were characteristically offering the loans expecting default of the loan and acquisition of the property.
- “Hard Money” Today …
Part of the definition of “hard money” still applies, with the loan being secured against property, and with rates of private loans being higher than those of a conventional mortgage loan from a bank. The key difference today is that the property isn’t the borrower’s home; it’s a short-term investment which wouldn’t likely be funded by a bank, so the property isn’t the owner’s risk, but the lender’s risk, and actually a mutual risk by design. In a competitive fix and flip market (such as now), the investor wouldn’t likely be able to secure the property with a bank loan because private investors can close within 7 to 10 days, and because banks value properties at purchase price (not ARV). Plus, fix-and-flip investors (like most entrepreneurs) typically have lower credit scores due to the repetitive credit-cash-credit cycles. So, the private lender takes the risk by valuing the property at ARV and by deciding that the borrower can responsibly rehab the property on budget and schedule, and then sell it at (or above) the projected ARV. The borrowers (who know what they’re doing) calculate the higher interest rate into their plan as the cost of getting access to the property. If the investment goes south, the lender has to foreclose on the property, and the borrower is likely to fight the foreclosure by making a usury claim against the lender … which isn’t beneficial to either lender or borrower.Rule of Thumb Test: Do both hard money borrower and lender and benefit from the hard money loan in a fix and flip, when the borrower/investor knows what he or she is doing, and when the lender knows that the borrower knows what they’re doing? Yes, otherwise, it’s regrettable to both.
To make the case for “local” private lending of “hard money”, we at MM Lending would simply suggest, especially for new investors, that fix-and-flip “hard money” is easiest and most beneficial when borrowed from the experienced local lender who knows the local market, knows the ARV, and will be most helpful in assuring … you know what you’re doing. As for the seasoned fix and flip investors experienced with other private lenders, what do you have to lose by getting the local rate quoted?
Contact us at MM Lending with your real estate investment opportunities, and request your free Pre-Approval and rate quote within 24 hours. Once you’re pre-approved, you can move quickly on that next deal and close within 7 to 10 days.