“Hard Money” Loans are actually “Easy Money” Loans
From where did the term “hard money” derive?
“Hard money” lending got its name back during the Great Depression after a large swath of the banking industry failed across the country. When property owners became desperate for cash, private individuals started lending money against real estate for interest rates that were higher than what the remaining banks charged.
It is not known exactly what the “hard” part of the expression refers to. Most people assume the term came about because these instruments are collateralized by hard assets like real estate or land. Given its origin in the Depression, some assume these loans were hard to get, or hard to pay back. Another theory is from the expression “cold hard cash,” meaning paper and coin currency.
The irony in today’s marketplace is that hard money is actually “easy” money, meaning easier than most funding sources.
Hard money lenders usually decide on a loan application within a few days, compared to 1-2 months for a traditional bank.
Although due diligence is still required with private money, it involves much less red tape. The lender’s underwriter is not reviewing conditions to satisfy some third-party investor’s credit committee. In most cases, the lender is the investor. Private lenders also aren’t subject to the burdensome regulations created by the 2010 Dodd-Frank Act.
For many construction projects, including fix-and-flip residential work, hard money loans are based on the property’s after-repair value (ARV); that is, what it’s expected to be worth once the project is complete. In contrast, a conventional lender must base it on the property’s appraised value or purchase price at the time of origination.
In all these cases, the private lender absorbs significantly more risk than a bank would; therefore, the reward in the form of interest rates and origination fees must be higher. For borrowers, a high interest rate for a short period is often a minor expense compared to the money they stand to earn on the project.
Since there is less regulation than banks, unfortunately there are some unethical private lenders. When choosing a lender ask if they are a member of AAPL (American Association of Private Lenders). The AAPL has a code of ethics that is intended to ensure the welfare of the consumer and to protect the reputation and integrity of the private lending profession. Also ask if they are licensed in the state they are lending. A licensed lender needs to be compliant with the state regulations and has annual audits.
In today’s market, hard money, or better said “easy money” is a great source of funds for real estate investors to purchase property quickly and beat out your competitors getting loans from a traditional source.
Reference: Why Hard Money has a Bad Name
By Jeff Levin| https://aaplonline.com/why-hard-money-has-a-bad-name/