Hard money lenders are enjoying boom
What is so-called “hard money” mortgage lending? Are these loans hard to get? What’s the downside if you get one? How did the financial crisis affect this segment of the lending business?
Hard money loans are short term, and generally not “consumer related”; that is, they’re for business purposes; the rates are high, and they’re designed for entrepreneurs who need a bridge from, say, property acquisition to profit on the other side.
These loans serve those borrowers and properties that the bank’s can’t handle, since the HM lenders can do what banks can’t. For example these noninstitutional capital sources still welcome asset based lending: loans based on the collateral property’s value rather than the borrower’s cash flow or liquidity. Once, banks could engage in this kind of lending, at least to a degree, but since the financial crisis, it’s a regulatory no-no.
A bank, thrift or credit union must base their loan to value ratio (LTVR) on the lesser of acquisition cost or the current appraised value. HML’s can, and often do, base it on just the appraised value. This could mean that, if the lender says that 60 percent of appraisal is the maximum LTVR, then a borrower could, on a $3,000,000 sales price, with a $4,000,000 appraisal, get at $2,400,000 loan, 80 percent of the price. And there are some hard money lenders that don’t even require an appraisal, relying instead on their own internal analysis.
Surprisingly, this does occasionally happen, as banks and other lenders are unloading foreclosed commercial properties.
If private lenders are waiving the rules that banks are compelled to follow, then you can bet that price will rule the waves of capital coming out of the HML coffers. Rates run from 9.5 to 16 percent, origination fees (points) from 3 to 6 percent. Since the loans are short, generally two to three years, they’re interest only.
The income that a property can generate is a key element in its valuation, and that income from the property can have more relevance to a hard money lender than the borrower’s cash flow outside of the property.
Just like the banks, the hard money people got hit hard during the great meltdown. Since their loans were based on the inflated value of the real estate, they took a bath when the bubble burst. Commercial property values dropped even more precipitously than residential prices.
Now the wheel has turned, values are down, bargains abound for potential developers and landlords, while bank lending is constrained by restrictive regulation. HML’s are enjoying a bit of a boom as people long on experience and vision — but short on cash — snap up bargains in land and buildings being peddled by a previous cycle of lenders.
Should you look for a hard money loan when your bank turns you down? Well, one of the tried and true ploys of real estate investing is to buy cheap, develop, remodel or finish a project, and parcel it out to retail purchasers, either businesses or homeowners. Thirteen percent for a couple of years looks pretty good if you stand to make a cash on cash return of 50 percent or better.
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His email is firstname.lastname@example.org.
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