Corporate debtors generally need to have liquidity however may not meet the criteria for conventional real estate loans. Loans that are collateralized by home collateral are known as hard money loans. These types of loans are granted by hard money lenders, consumers or groups who specialize in this kind of lending. They are happy to write a check instantly to the borrower once she or he is assessed for credit risk.
Because the likelihood of default is much higher, hard money lenders charge higher rates of interest, and they are the last secured lenders to get their money in a bankruptcy filing. Typically, such loans are capped at around two thirds of the most recent appraisal value for the home in repaired condition, generally quoted as an ARV (after-repair value). Contracts for short duration loans or “bridge loans” are written for property owners who need to have a short term solution until they can secure more permanent financing. This can be the case for financially distressed properties. Thus, hard money lenders tend to have a higher proportion of their loans contested in court.
The high interest rate charged is to provide protection against the higher risk of default and the associated court costs with a default on a loan. Sometimes the interest rate can be high enough that certain localities enact usury laws which can effectively ban hard money lenders from operating.
Thus the lenders in the industry are highly local, highly segregated and small organizations due to local regulatory practices. There are few regulatory organizations that provide oversight to this obscure market, and few names in the industry are known beyond professional real estate financiers.
Sometimes, though not often, loan sharks act as hard money lenders and charge extreme rates of interest which is seen as taking advantage of debtors. The victims of these types of lenders tend to be desperately in require of quick cash, and unsophisticated consumers who might not have the time to research the lenders or the technical understanding to know that they’ve signed their home as collateral to a 30% loan, perhaps with a quoted ARV lower than market, no prepayment allowed, or even worse lending terms.
Legitimate hard money lenders tend to charge rather high interest rates, however, the prime rate plus fifteen is common with five points on the loan. The local real-estate market for the specific property being lent on, local usury laws, bankruptcy laws, and how available credit is in the vicinity are factors a hard money lender will consider when giving a quote to a potential borrower. Real estate industry insiders normally know quite a few local hard money lenders and know how to shop around. Others with less experience should do a lot of research and fully understand what they are getting into so they can find the best terms and get the best deal for their hard money loan.
More about hardmoney as well as details about hard money lending can be learned at Stephen Von’s highly informative website.
