Among the many criticisms often leveled at hard money is the idea that it is too expensive to be worthwhile. So what’s the deal? Are such criticisms fact or fiction? That depends on two things: how you define ‘too expensive’ and the circumstances surrounding any given loan.
Hard money can be more expensive than traditional financing. But it doesn’t have to be. And sometimes, it’s not. There are many cases in which a hard money loan ends up costing the borrower less in the long run. But even when hard money is more costly, you are getting something in return. You’re paying for a service that institutional lenders cannot provide. There is value in that service.
Hard Money Basics
It is important to go through a few hard money basics for the uninitiated. First and foremost, hard money loans are offered by private lenders like Actium Partners out of Salt Lake City, UT. Hard money firms tend to be money managers who lend on behalf of multiple investors. A hard money lender is not a bank or licensed financial institution.
Hard money loans are also asset-based, meaning that approval decisions are based primarily on assets offered as collateral. Lenders look to see if the collateral can cover the amount being requested. If it can, the lender is good to go.
Interest Rates and Fees Are Higher
Private lenders in the hard money sector tend to charge higher interest rates and fees. This is where the main criticism of hard money being too expensive comes from. But people tend to look only at rates and fees without considering the rest of the details.
It is true that hard money rates and fees are higher. Lenders charge more than institutional investors because they assume more risk. But more importantly, hard money loans are short-term loans. Just as with traditional financing, shorter terms necessitate higher interest rates. That is just the way the business works.
What Borrowers Get in Return
As previously stated, higher rates and fees are offset by what borrowers get in return. They get a lot, beginning with speed. Institutional lenders can take a long time to do what they do. A typical commercial loan will not be approved for days. After approval, it takes months to close.
Hard money can generally be approved within a day or two and then funded a few days after that. Now, imagine a real estate investor looking to close on a lucrative property all the while knowing there are other investors waiting in the wings should his deal fall apart. He doesn’t have time to wait on a bank.
Going to a hard money lender ensures the investor gets the funding he needs quickly. He closes the deal and that’s that. From his perspective, the speed is worth paying for. It might even turn out that the higher rates and fees will be offset by the good deal he got on a piece of property that promises to generate tremendous revenue.
More Than Meets the Eye
It is easy to look at loan rates and fees and jump to the conclusion that hard money is too expensive to be worthwhile. Anyone can do it. But there is more to hard money than meets the eye. Dig into the details and you discover that it’s not as simple as just looking at rates and fees.
Hard money is extremely competitive with institutional lending strictly from a dollars and cents perspective. But even when it is more expensive, borrowers are getting a lot in return. So yes, it is worthwhile for most of them.