By Troy Funk
Sarasota, FL – In our current economic environment, traditional lending has become a huge failure to many financial investors and borrowers. This is evidenced by the small return consumers get by parking their money in a bank and the extreme hardship that many buyers face when attempting to borrow from a traditional lender. In addition, some sellers are unable to sell their home to a buyer that will require traditional financing, because their property does not meet traditional lender guidelines.
The alternative to this dilemma is to avoid investing, borrowing or selling through a traditional lender. This is where hardmoney (often known as private money) comes into place. In hard money lending, private investors loan money directly to consumers or through a private lender based on the collateral or equity available in the property the buyer wants to purchase. Buyers are not personally and financially scrutinized for bringing a hard money lender an investment consideration. The factors that are evaluated on each loan request are the potential equity in the property and the overall risk exposure to the hard money lender.
With this in mind, a hard money lender will normally only loan as a first mortgagee with a 70%+/- Loan to Value ratio, at an interest rate that is much higher than the current market interest rate with up front points. With this in place, a hard-money loan can be a great opportunity for a private lender, compared to having their money sit in a financial institution earning a small return.
For a buyer, this gives an opportunity to borrow money without the hassle that comes from traditional lenders. If a buyer finds a terrific opportunity in real estate on a property priced considerably below value, the buyer could be able to walk right into a strong equity position using a hard money lender to buy the property. This is especially relevant to individuals who may not be able to qualify for financing under the terms and expectations of a traditional lender.
Furthermore, there is real estate that can be difficult to sell through traditional financing, because of circumstance. For example, a home may need extensive repairs and the seller is unable or unwilling to financially address the required repairs. Traditional lenders will normally not loan money on a house with multiple repair issues, without an extensive evaluation and long approval process. However, if there is substantial equity in the property, a hard money lender may not see required repairs to a property as a problem. Normally a hard money lender will allow a buyer to secure financing immediately and address necessary repairs to a home after closing.
In conclusion, hard money creates real estate opportunities that may not otherwise exist by; 1. Potentially offering private investors a safe and higher than normal rate of return on their money 2. Allowing buyers to purchase property that they may not otherwise be able to purchase. 3. Allowing sellers to sell their property to buyers that need financing on their property, where their property may not qualify for financing under a traditional lender.
Questions? Troy Funk is a real estate expert, practicing in Sarasota and surrounding gulf coast cities. Troy can be reached at 941-957-3737 or by emailing Troy@TroyFunk.com