How To Use Hard Money In A Slow Market

By: Sean Flanagan
Submitted: 02:14AM on Tuesday 04 November 2008

There are thousands, probably even millions, of residential real estate investors who are securing the future of themselves and their families right now as a result of the real estate “blood bath”. These are savvy investors who have taken the time to learn the ins and outs of how to successfully buy properties from motivated sellers without using their own money.

Are you one of these people?

If not, it’s time to change that. There’s several ways to buy distressed properties and make a killing off them. For the sake of this lesson, I’m going to stick with one way which I’m constantly asked about by both new investors and seasoned investors alike. What I’m referring to is hard money loans and while they aren’t my favorite way to acquire property, sometimes they are necessary. The reason for that is simple. Right now is probably the best time to buy real estate that many of us will see in our lifetimes. However, money is much harder to come by right now than it was a few years ago. Banks, while not most investor’s choice of funds, have significantly tightened their lending criteria. Because of this, you may soon be faced with the decision of either using hard money to fund a great deal or passing on it entirely. If it truly is a great deal….why not use the hard money?

Hard Money Loans Are Still Readily Available

In case you don’t know, hard money lenders make loans in days, not months, like conventional financing. It’s fast and usually easy and can be used to buy anything from a distressed house to a pretty house with a ton of equity. But…it comes with a price tag. The name “hard money” typically refers to borrowed funds which have “hard” terms and a high interest rate. By “hard terms”, I mean you may pay 5 points up front and have a 12 month balloon payment. In other words, if you borrow a hundred grand it may cost you 5 grand when you borrow it and you may be required to pay it back within 12 months.

While that’s not always a real exciting idea, it’s sometimes the only way to get a great deal done. I don’t know about you, but if I’m looking at a $50,000 profit within the next 60 days and that’s the only way to get it done...I’m using hard money.

That’s the Good News, Here’s the Bad…

Before the market turn in a downward direction, hard money was pretty easy to come by. Lenders ranged from big institutions to people who pulled some equity out of their primary residence and used it to lend money on discounted properties. Well…those days have come and gone and we’re left with much fewer choices. To complicate matters even more, not only are their much fewer choices but the choices we do have now are much more difficult to qualify for.

Here’s what happened…

Speculative “investors” bought everything they could find to buy when the market was hot. They often used hard money loans to buy and then planned on quickly reselling for a profit or refinancing the hard money loan with conventional financing.

Well…that plan blew up in their faces!
The speculators saw the market turn downwards and conventional financing options disappear and they were unable to meet the obligations of the hard money loans. This left the hard money lenders in a position where they were forced to play the role of “repo man” and foreclose on a bunch of houses which were rapidly depreciating. Now they’re more in the “asset management” business than the hard money business. Those who didn’t go out of business entirely are still lending…but much more cautious.

How to Find the Needle in the Haystack
So, where does a new real estate investor go to find a good hard money source that will lend them money to do deals? I’ve been involved in hundreds of real estate transactions and I’ve only used hard money a handful of times. There’s usually a better, more profitable way. The trick to finding that “better, more profitable way” lies in your education.