Top 10 Reasons Real Estate Investors Use Hard Money Loans

Written on October 31, 2016 by , updated on November 10, 2016

Hard MoneyHard money loans are a financing tool every real estate investor should keep in mind.

The main advantages of speed and flexibility usually come to mind, but there are many other reasons real estate investors use hard money loans. This article discusses the top 10 reasons real estate investors use hard money loans.

1. Fast loan approvals and funding

Applying for a hard money loan is a simple and straightforward process. In most cases, all a borrower needs to do is to fill out a standard loan application. In many cases, a borrower can receive a conditional approval after a five-minute conversation with a hard money lender.

Compare this to the countless pages a bank requires a borrower to fill out. Once the application is submitted to the bank, it could be weeks or longer until the borrower receives approval or even a response. The subject property could be snatched up by another real estate investor by that point.

Once the real estate investor has been approved for the hard money loan, the loan can be funded within a week or two. If needed to save a deal, reputable hard money lenders can fund a loan within three to five days. Bank loans can take 30 to 45 days even without any major problems popping up.

2. Hard money loans make the real estate investor’s offer stronger

An offer from a real estate investor with a hard money loan as financing is seen as strong. This is especially helpful in situations where a property has multiple offers from buyers with conventional bank loans. The hard money loan offer stands out.

Anyone who has been involved in real estate long enough will hear about a bank pulling financing from the buyer during escrow, putting the deal in jeopardy or killing it altogether. Hard money lenders are not known to pull funding for arbitrary reasons and thus can be a more reliable source for financing than conventional lenders.

3. Negotiating a lower purchase price with a quick close

As with offers that are all cash, real estate investors may be able to negotiate a lower purchase price with the promise of a shorter escrow period and a quick close. A motivated seller is more likely to negotiate when closing the sale as soon as possible is a top priority.

4. Income history and perfect credit scores are not necessary

The most important factors a bank considers when approving loans are typically the borrower’s credit and income. If either of these is outside the bank’s criteria, the loan will most likely not be approved.

Hard money lenders primarily focus on the value of the property that will serve as the collateral for the loan, as well as the equity (down payment for a purchase) the borrower has in the property. The hard money lender must be comfortable with the valuation and equity, as this is what allows them to not be as concerned with the borrower’s income and creditworthiness.

5. Using leverage to get more deals

Real estate investors who can purchase properties with cash enjoy many benefits. They can get more of their offers accepted at better prices, and they can buy properties at all-cash auctions. The main disadvantage of doing deals with all cash is that it limits the amount of deals that can be done at one time. An investor may miss a great deal because all their funds are tied up in another project.

Using a hard money loan (which generally allows for financing of up to 75% LTV) allows the investor to secure properties while still having enough funds on hand to purchase and complete other projects.

6. Reinvesting equity from an existing property into a new property

When a real estate investment opportunity arises, there is often a limited amount of time in which to make a decision and act. If a real estate investor needs to raise money to fund a purchase (or down payment for a purchase) there are usually few options available.

Fortunately, cash-out refinance loans from a hard money lender are available to investors who have a sufficient amount of equity in their property. A direct hard money lender can process a cash-out refinance loan and have the funds available for the investor in about a week.

7. Getting approved for a loan with recent issues on record

Many issues on a borrower’s record could prevent a bank from providing financing, such as recent short-sales, bankruptcies, loan modifications, and foreclosures. Because hard money lenders are asset-based, they can look past these types of issues and instead focus on the borrower’s equity (or down payment) in the subject property.

A real estate investor doesn’t have to stay on the sidelines for years because of a blemish on their record.

8. Obtaining financing when a bank will not provide additional loans

Many banks will cap the amount of loans to a single borrower at four. Hard money lenders do not have these types of limitations. They are primarily concerned with the borrower’s equity in a property. Hard money lenders often view working with an investor with multiple properties as a positive because the borrower has more options and can cross-collateralize properties if needed.

9. Using a lender who can be flexible

Conventional banks lenders are notorious for being very rigid and having arbitrary rules and regulations that prevent borrowers from obtaining loan approval. While hard money lenders do have criteria a borrower must meet to be approved, it is significantly less than what is required for a bank loan.

A hard money lender is much more likely to work through an issue with a borrower and to offer a creative solution that satisfies all the involved parties.

10. Getting free advice from a real estate expert

Working with a hard money lender is a partnership. The hard money lender wants the project to go as smoothly as possible, just as the real estate investor does. The last thing the lender wants is missed payments, unforeseen issues with the property, or any other potential problems that put the project in jeopardy.

A reliable and experienced hard money lender analyzing a loan request or project will give their honest opinion and bring up any issues that could jeopardize the project. The lender may bring up concerns the real estate investor was not aware of that could potentially hurt the project if not addressed. The advice from the hard money lender could also cause the real estate investor to reconsider moving forward with the subject property altogether in order to avoid taking a loss on the project.

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