Hard Money Loans
Hard Money Loans:
A Hard Money loan is an asset-based loan financing in which a borrower receives funds secured by the discounted value of parcel of commercial of real estate.
The Hard Money lender will look at the property and offer a loan at a level that if he has to foreclose he can sell it, and make a profit, at auction.
Hard moneylenders are hard hearted, charge big points up front (typically 5 to 7 points), demand high interest rates (15% to 20%) and limit the loan to a very short periods of time, usually 6 months to 2 years. Hard money loans are typically interest only loans.
On the positive side:
Hard Money loans can save your bacon, or make you a large profit, in special circumstances.
Example Case:
Say a business owner has suffered a bankruptcy and the assets, including a free and clear commercial property, is tied up in court. The other business debts have been settled in bankruptcy court with the disposal of non real estate assets and now a sale of the real estate will close out the bankruptcy, pay the attorneys and other remaining costs, plus put some bucks back into poor guy’s pocket to start over.
However the judge says the real property has to be sold in two weeks — or the court will auction it off and the owner will get nothing.
Suppose you learn of this situation and desperately want to own this $30 million property for a court-approved sale of $10 million. Your Bank can’t act quickly enough to provide the financing and you know the property will sell at court auction at $20 million.
What do you do? You get a Hard Money Loan!
Hard money lenders can act fast. They fly out to see the property and decide to loan you $10 million to do your deal and they promise to close in 5 days.
You are saved!
The typical cost for this example loan might be $700,000 in up front points to the lender and 18% interest only, for a term of 6 months.
Now you own a property, worth $20 million at auction, bought for $10 million with the help of the hard money lender and you have 6 months to resell it at a nice profit —- or obtain conventional financing to take out the hard money lender and hold the property for your own use.
Hard money loans are normally utilized in dire cases, but used intelligently they can provide a borrower a way to score a major profit.
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