It is no secret that property investors often turn to hard money lenders to fund new acquisitions. Hard money is a preferred form of funding because it’s easier to obtain, loans can be closed faster, and lenders have the ability to be more flexible with their lending criteria.
At Actium Partners in Salt Lake City, UT, the vast majority of their hard money loans go to property investors in Utah, Colorado, and Idaho. Actium Partners prefers to focus on commercial real estate because it is such a lucrative market.
Just to give you an idea of why a real estate investor might turn to a hard money lender, Actium offers the following four scenarios:
1. A Buyer Facing Stiff Competition
The first and most common scenario is a buyer facing stiff competition for an attractive piece of property. You might have an investor willing to make an offer today even while three or four more are waiting in the wings. In many cases, sellers are willing to entertain multiple offers simultaneously. The buyer who gets the deal done first is the ultimate winner.
Hard money is a big plus because it can be arranged so quickly. For instance, Actium Partners once closed a deal in less than one business day. They got a call from a desperate investor during the late morning hours on a Friday. They approved a loan that afternoon and wired both documents and funding to the title company at the start of business on Monday morning. That is quick.
2. An Undervalued Property
A second scenario involves a property that has been undervalued by traditional lenders. They don’t see enough value to take on the risk of a loan. A hard money lender, particularly one with local knowledge, may feel that the property has more value than it is being given credit for. As long as the value is there, a hard money lender can more easily find a way to approve and fund the purchase.
Just as a side note, the opposite scenario also exists. There are times when hard money lenders do not see the same value as traditional lenders. They turn down loans for that very reason.
3. Refinancing an Existing Property
Although refinancing existing properties is not the norm for hard money, it is done from time to time. An investor might want to refinance a property in his portfolio in order to raise cash for other needs. He looks to a hard money lender for help.
Under such conditions, the most likely scenario is a short-term loan that provides the investor with immediate financing while he works out a long-term arrangement with a traditional lending institution.
4. Obtaining a Bridge Loan
The fourth and final scenario involves a real estate investor looking for a bridge loan. As a short-term instrument, a bridge loan is designed to meet immediate financing needs and simultaneously give the borrower time to arrange other funding.
An investor might want to buy a piece of rental property but cannot get a traditional long. So he obtains a hard money loan with a term of 24 months. During that time, he can accumulate a record of rental payments to support a traditional loan a couple of years down the road. That traditional loan would go toward paying off the hard money loan.
It goes without saying that the majority of hard money loans go toward property transactions. But hard money is useful for other needs as well. From expanding a small business to refinancing existing debt, hard money is often the best option for borrowers.
