Very often, a person seeking a loan will follow the traditional path, choosing a bank, credit union, or other large financial institution. This is great for many circumstances. Another option is to go to a borrower with hard money. They are usually wealthy people who finance people like real estate investors. These lenders lend the investor an amount equal to a percentage of the property’s fair market value after the renovation. This amount is expected to be sufficient to purchase real estate and pay for at least part of the renovation.
Knowing when to work with a hard money lender depends on understanding the terms of the loan
This can vary greatly from person to person, but there are some general trends that are helpful to know during the decision-making phase. First, hard money loans do not have to go through the bureaucratic process inherent in traditional financial institutions. As a result, funds can flow quickly. This is extremely beneficial for young real estate investors who need to buy a property before being bought by someone with a more established bank account.
It’s also important to know that the hard money lender generally charges higher interest rates and closing costs. The exact number depends on your credit score, but the interest rate can go up to 20% and can be up to 10 points for the closing cost. Therefore, while the money will appear faster, the young investor should be aware that he can quickly renovate and sell the property so as not to accumulate too much interest. If you are considering this option, make sure you have a repair team on standby.
You must understand some of the risks. A hard money lender is very different from a traditional institution in that the lender is not part of a large bureaucracy. This is a person with some wealth who wants to make smart and safe investments. While there are some significant advantages to this, the disadvantage is the lack of predictability compared to a bank. The lender may simply reject your request at the last minute, or the transaction may take longer than anticipated.
This should not prevent anyone from walking this path; the point is, you need to do your research. Try to find as much information as possible about this person’s reputation and be sure to take precautions. Also, be aware that this lender is taking risks to help finance your project, and it is likely that you are also taking precautions. If time is an important factor, or you need financing right away, you may want to consider taking a different route or postponing certain investments.