Hard money lenders make risky loans

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Services for Real Estate Pros with Hard money lending for investors in NH and MA

Hard Money Myth #4

Hard money lenders make risky loans.

The reality: While the collective wisdom, even among real estate and mortgage professionals, is that hard money lenders make risky loans, our experience is that the opposite is true. Because such lenders are typically lending their own money (as opposed to a bank employee lending someone else's money) they are particularly risk averse. Unless a hard money lender really understands how to value the collateral against which he is lending and the prevailing market, he will likely not make the loan, regardless of the strength of the borrower or the LTV. Infrequently a hard money lender will consider history with a borrower because of the borrower's consistent performance.

On the other hand, with understanding comes knowledge, and a hard money lender may make a loan that others consider risky because he simply has better information. If a lender understands a market and has an exit strategy himself should he/she have to take back a property, the lender perceives less risk and might lend where others won't.

This is why many hard money lenders are truly local, and don't use conventional appraisals to make decisions on valuation. They may use the appraisal as a source of information about the property, but they will value the property themselves based on their knowledge of the local market and the trends in a neighborhood.

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Rainer
102,960
Tom Robinson
Keller Williams Realty Kingstowne/Alexandria, VA Office - Fairfax, VA
Experienced Real Estate, Professional Serving No. VA and DC

The interest rates are generally 12% and UP to 18% or so. These are interest only balloon mortgages for usually less than two years with high points. I consider hard money a last resort. The borrower better know what he/she are doing as well. There are no short sales in hard money. You will lose the property, period.

January 17, 2011 07:03 AM #1
Rainer
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Ann Bellamy
Hard money lending for investors in NH and MA - Tyngsboro, MA

Tom, you are mostly correct, except the "last resort" part.  Since we lend to investors only, and typically to very experienced investors, they usually know what they are doing.  The properties are typically in significant disrepair, and conventional lenders won't touch them.  The investor considers hard money to be a tool, not a desperation move.  It is a very short term loan for the purpose of repairing and/or stabilizing the property.  The property is then sold or refinanced when it is stabilized.

And as for short sales in hard money, I have seen short sales approved by hard money lenders.  They are infrequent, but not unheard of.

A hard money loan to an end homeowner would definitely be a last resort, but the SAFE act has mostly eliminated private lending to end buyers. 

January 17, 2011 07:18 AM #2
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Rainer
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Ann Bellamy

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