Exhaust your other sources before using a “Hard Money Lender”
Can’t live with them. Can’t live without them. What do spouses and hard money lenders have in common? Besides rereading the first two lines, keep in mind that they also come with serious and hard to break contract obligations! As with marriage, this law firm also strongly recommends a cautious period of “courtship” before making a commitment to a hard money lender (HML). While we represent a few and can give out contact information for several to interview in our area, working with an HML requires a great business plan, the ability to acquire, rehabilitate and resell property quickly, and some luck as well. More than a few real estate investors have complained that when they use “hard money”, they never make as much on the investment as the HML.
The use of HMLs is even scarier when desperate homeowners turn to HMLs to save their homes from foreclosure. Most of the time, the homeowner is not as savvy as the real estate investor or the HML and should never undertake borrowing money against the family home without legal representation! Sometimes, the use of an HML can make sense, even for a homeowner, as in the case when a closing on the sale of their home is just days away but the foreclosure on their home is just hours away. But the situations in which Hard Money is less expensive than hiring an attorney as a short sale negotiator to get a postponement of the foreclosure are fairly rare.
Exactly what constitutes an HML? HMLs are lenders who generally charge interest rates well above market rates and often charge “points” as well. While a homeowner in today’s market with good credit can borrow from an “A Paper Lender” at 3.5%, HMLs are still charging 15% or more for the use of their money. The main advantage is that HMLs make lending decisions more quickly than banks and will lend to borrowers with low credit scores. HMLs focus on the value of the property which will secure their loan.
Why do so many investors, even some with good credit, end up using HMLs? According to one prominent Northern Virginia investor: “There are many sources of cash and financing out there. I believe one of my most valuable real estate investing skills is finding capital. All it takes is some professionalism and a whole lot of persistence.” Most investors and homeowners are simply not persistent enough or are not willing to jump through the hoops to take advantage of less expensive sources of funding. Check out the suggestions in the WSJ article on finding more affordable financing by clicking on the link above!
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