Hard Money Works
The benefits of hard money or private lending are many. These funds provide individual investors with returns much greater than they can get from a stock or mutual fund while at the same time secured with a physical asset- real estate. Individual investors have the opportunity to review a potential project offered up by a developer who applies for a hard money loan. The investor can decide whether or not to participate in a particular project or wait for the next one. Hard money loans are secure not just due to the first lien status a hard money loan has but hard money loans typically ask for at least 30% from the borrower, providing an additional equity cushion for the investor. But there is a real benefit beyond what the investor receives and often goes unnoticed. Hard money lifts all boats. How is that?
Conventional loans, those underwritten to standards set forth by Fannie Mae and Freddie Mac have specific guidelines mortgage companies must follow. When a property is located and a sales contract signed the lender in reality issues two approvals- one for the borrowers and one for the property. The property must meet certain physical standards and there must be similar properties in the area that have recently sold. Yet sometimes the property is in such poor condition that conventional financing won’t work. Say a home needs some significant foundation work. The foundation can be repaired but until the foundation is fixed conventional lenders will sit on the sidelines. Once the foundation is repaired and inspected, then mortgage lenders can approve the project. This is the utility of hard money. Hard money helps developers buy the property while at the same time securing funds for needed repairs. But here’s the oft-unnoticed benefit- the neighborhood.
Have you ever driven through a neighborhood and admired the homes in the area? Nicely painted, manicured lawns and maybe a park down the street? But sometimes in these neighborhoods there is a home that is a real eyesore. It’s obvious there is work that needs to be done on the home but due to its condition a bank won’t make a loan on the property. When an appraiser visits any of these homes in the area to make an appraisal if the property sits right next to the dilapidated structure it will affect the market value of the property. Further, if the home is vacant and is just sitting on the market with no buyers, it can affect property values throughout the area.
Hard money lending however fixes this problem. Hard money goes into an area and repairs that eyesore of a home, bringing it up to par to scale with the other homes. Hard money and private lenders revitalize communities and paving the way for a new buyer to secure conventional financing for a home.