Hard money loans are known for higher interest rates, higher fees, in shorter terms. They do not seem like a good deal on the surface. So then why do investors prefer them? It boils down to two things: speed and flexibility.
Investors don’t look at financing the same way consumers do. There is some amount of urgency built into investing, especially when an investor is involved in real estate. So the last thing an investor wants is financing that does not align with the urgent nature of the real estate business. That is exactly the problem they have with traditional funding.
Hard money loans are preferred because lenders are more flexible and can work more quickly. Conversely, banks are slow and tied to rigid standards and procedures. Banks provide a valuable service to certain types of borrowers. But those borrowers are not real estate investors.
Speed Is the Name of the Game
If I had to choose one aspect of real estate investing that creates the biggest challenges, it would be the speed at which deals are done. It is important to know that real estate investing is highly competitive. There are plenty of investors with plenty of money to throw around. So if you are going to compete, you need to be ready to go at a moment’s notice.
The most desirable properties sell almost as quickly as they are listed. And when multiple investors are interested in the same property, it is not unusual for a seller to choose the buyer who can get to closing the quickest.
A real estate investor having to wait months for a bank loan simply cannot compete. Properties are bought and sold far too quickly. So instead, investors need access to funding in a matter of days. That is what hard money offers.
A Real-World Example
A real-world example of how fast hard money is comes out of Salt Lake City, Utah and a firm known as Actium Lending. Actium was contacted by a desperate investor whose bank backed out of a loan just one day before closing. The investor was at serious risk of losing both the deal and his earnest money.
Actium Lending was able to evaluate the property that same day. The loan was approved, the documents prepared, and funding was provided in time to complete closing on schedule. In just one business day, Actium made it work.
Flexibility Is a Big Plus, Too
Speed is a significant factor for real estate investors. But so is flexibility. The problem with banks is that they are so rigid. Banks only write certain kinds of loans. Their lending criteria are unchangeable. And as far as negotiating rates, terms, and fees, forget about it. You get what you get based on whatever a bank’s standard procedures call for.
Hard money lenders are not banks. They are not even licensed financial institutions. They are individuals and businesses licensed to engage in private lending. As such, they have a lot more freedom and flexibility in what they do.
Actium can structure a hard money loan according to the borrower’s specific needs. They could go through an entire year with no two loans being identical. Investors need this kind of flexibility because the deals they pursue rarely qualify as cookie cutter deals. Every investment is slightly different. Lenders need to be able to accommodate all sorts of unique needs.
The Best Option for Investors
It turns out that hard money is the best option for real estate investors. Thanks to speed and flexibility, hard money lenders can meet nearly all borrower’ needs.