Top 10 Reasons Real Estate Investors Use Hard Money Loans
Jun 12, 2017
Many real estate investors bypass traditional lenders when it comes to acquiring commercial loans, but some borrowers have yet to consider the benefits – or simply haven’t heard them yet. If you’ve heard mention of commercial hard money loans but aren’t sure how they can benefit an active commercial real estate investor like yourself, here is why you may want to give them a second look.
1. Faster commercial loan approvals and funding
With a traditional lender, it might take up to four months or more to secure a commercial loan, but as many seasoned commercial real estate investors already know, the timeline once a subject property is on the market is frequently much shorter, even just a week or two.
Conversely, applying for a hard money loan is a much simpler process and can provide funding within that crucial timeframe. After filling out a commercial loan application and providing the necessary information, a reputable lender can fund a commercial hard money loan within a week.
2. Ability to overlook shortfalls in a borrower’s financials
As a part of the underwriting process, traditional lenders often wish to evaluate financials associated with a business or subject property. However, this requirement can be prohibitive to some real estate investors whose financials may not be available at all. Commercial hard money lenders do not require the financials associated with a business or a property, instead basing the loan off the value of the subject property.
3. Stronger purchase offers for real estate investors
Most individuals involved with real estate have experienced (or heard of) a situation in which a bank pulled financing from the buyer during escrow. This possibility is not only inconvenient, but can also endanger the deal altogether.
Because hard money lenders are focused on asset-based loans and the value of the borrower’s collateral with regards to their lending decisions, they’re much less likely to pull funding for arbitrary reasons. In real estate, reliability is key.
4. The possibility of negotiating a lower price with a quick close
Real estate deals move quickly, and while this can drive the price up when there’s a great deal of competition, it can also drive the price down. If multiple parties are interested in purchasing an investment property that the seller is eager to move, those with funding from conventional lenders may be at a disadvantage when negotiating on the price.
Should an individual be able to provide payment within one or two weeks (as opposed to a month or longer), they may be able to negotiate a lower price by guaranteeing a shorter escrow period and a quicker close.
5. Using leverage to afford more deals
Paying with cash is frequently viewed as the trump card when it comes to making an offer – they can buy properties at all-cash auctions, they can often secure lower prices, and they can make the purchase quickly. Unfortunately, purchasing a property in cash ties up one’s funds – this can cause an investor to miss out on an attractive opportunity should one arise at the wrong time.
As a workaround for those who pay in cash, a commercial hard money loan can provide financing while allowing more cash on hand should another project come up.
6. Reinvesting equity from an existing property into a new one
While it is difficult to secure financing for an investment opportunity, it can be even more difficult to refinance or reinvest the equity from another property to acquire a new one. This can prevent a purchase, or even a down payment, and kill an opportunity.
For those investors with sufficient equity in their property, many commercial hard money lenders can provide cash-out refinance loans. The timeline for this type of loan is actually similar to other types of hard money loans, which means the funds for a down payment or full purchase are within reach.
7. Getting loan approval despite having blemishes on credit history
For anyone seeking financing through conventional lenders, a host of issues in one’s credit history can prevent them from receiving the financing they need. Past bankruptcies, loan modifications, foreclosures, and more are all factors that banks consider – and often will cause the bank to deny the loan.
For hard money lenders, loans are not approved based on “credit worthiness.” Because they utilize asset-based loan programs, they focus on the value of that asset.
8. Obtaining financing when other elements are outside a bank’s lending guidelines
Credit history isn’t the only lending standard banks have for borrowers. For example, many banks will place a cap on the loans they’ll extend to a single borrower of four. While this helps mitigate risk for these lenders, it can severely hamper plans for very active real estate investors who may be engaged in a wider array of properties or deals than fall within a bank’s lending guidelines.
Once again, hard money lenders’ focus on a collateralized asset’s value means these limitations are often not present, which can benefit especially busy investors.
9. Flexibility by the hard money lender to customize a loan package
As one of their many methods for avoiding risk, banks are known for being very rigid with their lending regulations. Borrowers can be denied approval for a loan for seemingly arbitrary factors, which can be incredibly frustrating.
Of course, hard money lenders have their own criteria borrowers must meet to be approved, but it is a substantially smaller amount than banks require. Should there be a specific issue preventing a loan, the hard money lender is more likely to discuss possible solutions that fit both you and them.
10. Getting free advice from a real estate expert
The last thing a reputable lender wants is for there to be difficulty with the loan, repayments, or property. Because of this, a hard money lender will often communicate their perspective and opinion on the project’s outlook, rather than just approve a loan.
With vast experience in asset-based lending, this can be a huge benefit to the investor, who may discover potential problems that could put the project in jeopardy.
Are hard money loans right for you?
Your situation may call for a commercial hard money loan, and it may call for a conventional bank loan. Your best bet is to discuss your outlook with your financial advisor before taking a step into purchasing any investment property. However, now that you understand the advantages hard money loans can offer commercial real estate investors, you can continue your research on asset-based loans with a solid foundation.
This article is a part of our Getting a Commercial Loan: Complete Guide, a comprehensive resource for anyone looking to secure a commercial loan. Read more at the link.