The truth about hard-money loans

Costs, terms often more onerous than conventional mortgages

By Inman News Feed
Add Comment Add Comment | Comments: 11 | Posted Mar. 26, 2013

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Costs, terms often more onerous than conventional mortgages

Benny Kass
Inman News®

DEAR BENNY: What is a "hard money" loan? --Irene

DEAR IRENE: Technically, it is a loan that is given in exchange for money, rather than to assist a consumer in buying a house. The latter would be called a "purchase money" mortgage.

Hard-money lenders do not rely on the creditworthiness of the borrower. Instead, they look to the value of the property. The lender wants to make sure that if the borrower defaults, there will be sufficient equity in the property over and above the amount of the loan. Accordingly, you will not get a hard-money loan of 80 or 90 percent loan to value; typically, they will range from 50 to 70 percent loan to value.

Such loans are considered "loans of last resort." If you are unable to get a conventional loan from a bank or mortgage broker, you may be forced to negotiate with a hard-money lender, who often are private individuals loaning money from their pension plans.

And beware: Those loans are more expensive and often have more onerous terms than the standard mortgage backed by the federal government, Fannie Mae or Freddie Mac.

Who typically gets such a loan? If you have bought a house and haven't yet sold your existing one, you might get a hard-money bridge loan. They are typically short-term. Other users are homeowners with bad credit but lots of equity in the home who want to avoid foreclosure. Unfortunately, from my experience, all too often the hard-money lender ends up owning the property.

There are many legitimate hard-money lenders. However, as in every profession or industry, there are some bad apples. Some hard-money lenders are loan sharks whose sole objective is to take your house away from you.

If you need a short-term loan and decide to confront a hard-money lender, please have your attorney review all of the legal documents the lender will ask you to sign. You want the money, but you don't want to lose your valuable home.

DEAR BENNY: We have a time share that we want to deed back to the resort, but they want $1,750 dollars to take back the deed. We are in our 70s and want to know if we can just give the deed back without paying the fee. Can they put a lien on our house? We don't care about credit ratings, since we pay cash for everything. --Don

DEAR DON: You cannot just "give away" the deed. It has to be accepted by the resort and recorded among the land records in the county where the property is located.

If the resort will take back the deed and relieve you from any and all further obligations, I would jump at that opportunity. Obviously, I would try to negotiate a lower buyout or try to work out a payment schedule. However, from the many readers who have time-share problems, your situation is unusual.

I do want to comment about your statement that you don't care about your credit rating. You may pay everything in cash and be a multimillionaire, but there may come a time when you will need credit, and a poor credit rating can, and will, haunt you for the rest of your life.

DEAR BENNY: I live in a 125-unit condominium. Recently, our board of directors signed a contract for almost $1 million to upgrade our elevators. I believe that the board did not get any bids and just went with one company. Is there any law requiring more than one bid on any one job, especially one as large as this? --Henry

DEAR HENRY: To my knowledge, there is no law on this subject; it's really a matter of common sense. And in a community association, it may also be a matter of fiduciary duty.

If you lived in a single-family home and wanted to do major construction, I am sure that you would get at least two, if not three, bids on your project. You would meet with each prospective contractor, get references and make sure they have the appropriate licenses to do your job.

Why should this be different in a community association? Your board of directors is spending your money and it has a fiduciary duty to you (and all other owners) to be prudent. Accordingly, to just get one bid is, in my opinion, unacceptable and may actually be a violation of the board's collective fiduciary duty.

Equally important, there is often suspicion on the part of owners that board members are getting kickbacks from the service providers. Clearly, just accepting the first bid adds to this suspicion.

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COMMENTS

Comments 1 - 11 of 11
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1. Anonymous said... on Jun 13, 2013 at 10:42PM

“Dear Benny: I'm a new real estate investor and I'm looking for good creditable hard money lenders. Can you recommend any?”

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2. Charmcaster said... on Jul 16, 2013 at 01:35AM

“Hard money loans? There are people who thinks it easy to cope with this kind of loan. For me, one that should be considered as hard money loan is the 401(K) loan where many of us suffered in paying for it. Despite 401(k) loans making good financial sense in theory, the number of 401(k) loan defaults is still much higher than normal. A number of people have trouble paying them back once they borrow from their retirement funds. If you need some financial help, get a payday loan.”

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3. Does your business need funding said... on Oct 12, 2013 at 05:39PM


I Mr Nicholas Williams own a legitimate loan company that offer out reliable good loan offer at an affordable low interest rate of 3% for the period of 1 to 30yrs only ,i issue out different types of loan ,loan such as personal loan student loan company business loan private and public investor loan so for more details if interested reach us via email:nicholasloanagencys@gmail.com

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4. Nacho said... on Nov 11, 2013 at 12:19AM

“There are lots of hard money loans. It seems like there's nothing but not so great news going around nowadays, but then again a ton of it is down to the press just fear-mongering again because it gets ratings. Anyway, there is something to give some people hope, specifically if they have retirement anxiety. A number of reports revealed that 401(k) plans are beginning to make cash again, after years of stagnation. You can get a cash advance to pay for things while waiting for your retirement account to go up.

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5. Monty said... on Nov 13, 2013 at 06:17PM

“Hard money loans are designed for investors - commercial
Consider a bank that may charge 6% for short term loan for distressed property and hard money that charges 12-14%. You are paying for the "availability of capital' at a premium. A good deal should support such and its usually less than a partner.

Equity investors often take 25-50% of a development, so hard money if used as bridge (most 6 months to 2 years) is a very useful tool

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6. bot said... on Nov 27, 2013 at 05:59PM

“trying to find hard money lender”

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7. darr said... on Nov 27, 2013 at 06:05PM

“trying to find a hard money lender that lend in Sharon hill, Pa that will do a rate & term 1yr the borrow has good credit”

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8. inAmust said... on Nov 28, 2013 at 03:10AM

“People usually turns into hard money loans if they don't have any choice. As an example, after you move to a new place, you never know what your utilities will really cost you until you get that first bill. You may have been anticipating a fifty dollar bill and end up with a two hundred dollar bill. You can pay for the unexpected additional expenses with a payday loan. You would not wish to be late on your first bill. Get more information here

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9. Abe said... on Jan 23, 2014 at 09:58AM

“In response to a few people asking for a credible hard money lender. I have worked with White Glass Lending (http://www.whiteglasslending.com). They have an indepth vetting process that keeps them from taking loans that will default (apparently they don't like loan-to-own). But if they give you a loan, it helps to validate that the property has good investment potential. Hope this helps,

Abe”

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10. Anonymous said... on Mar 12, 2014 at 02:42AM

“Hello everyone?
My name is Mrs Shirley I live here in USA and i am a happy woman today? and i told my self that any lender that rescue my family from our poor situation, i will refer any person that is looking for loan to him, he gave me happiness to me and my family, i was in need of a loan of 10,000.00 dollars to start my life all over as i am a single mother with 2 kids I met this honest and GOD fearing woman loan lender that help me with a loan of 10,000.00 dollars, she is a GOD fearing woman, if you are in need of loan and you will pay back the loan please contact him tell him that is Mrs Shirley that refer you to her contact lady lopez via email: Ladylopezloaninstitute@gmail.com
thanks and God Bless
Mrs Shirley”

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11. VA Lender said... on Apr 7, 2014 at 02:12PM

“As with anything, there are positives and negatives to each hard money lender. A good one will provide much more than just capital, they have expert local knowledge, a network of experts across related areas (e.g. architects, permit expediters, etc.) and a great feel for project success. For example, on in Washington DC and Northern Virginia is: www.congressionalcapitalva.com”

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