The Lure of Hard Money
One of my favorite movies is Easy Money with Rodney Dangerfield and Joe Pesci. Rodney’s character made a deal to give up all of his vices to inherit his mother-in-law’s fortune. It turned out to be harder than he imagined.
There is nothing “easy” about obtaining a Hard Money loan from a private lender. It is a proposition based on risk. The lender assumes the risk of repayment of a highly leveraged loan, the borrower assumes risk of paying up-front fees to someone who will not perform, and the brokers assume the risk of getting squeezed out of the deal. Hard money fees can be as high as 10 points with interest rates above 12% and upwards of 20%.
Real Estate Investors
As a private lender, I am hesitant to work with people who call themselves “real estate investors.” You may be the next Donald Trump, but if you have no cash in the deal, it’s a waste of time for everyone. Investors will always avoid the term 100% financing. When you ask the investor how much he/she is putting down, they respond like a politician at a Senate hearing. Calling yourself an investor is another way of saying I don’t need realtors and I don’t have a down payment. News flash: No one lends 100% on commercial real estate. Stop here if you are a “real estate investor,” to continue with this article, you need 35% down.
Hard Money Lenders
Some people use the terms private lender and hard money lender interchangeably. Private lenders come in all flavors and many of them have lending requirements similar to banks. They may be wealthy individuals or groups that aggregate investors and leverage hedge funds. Many of them are brokers with access to direct funds from various sources. Both lend on hard assets, but the difference is that hard money lenders do not scrutinize the borrower as much as the property, whereas most private lenders are looking for strong borrowers. Hard money lenders charge outrageous fees with as much as 10-12 points, high interest rates, and leave the borrower guessing for weeks as the “lender” passes the loan around to different brokers. Conversely, most private lenders charge institutional rate and will charge 1-3 points, depending on how many brokers are involved. Private lenders also avoid broker chains which put a load on the lending parameters and equity structure.
Don’t Fall for the Lure of Hard Money
So the money is easy to come by for “real estate investors,” as long as the property has good upside, right? Wrong! Even the hard money guys need the borrower to have skin in the game. It is just common sense; if it were easy, everyone would be doing it. Isn’t that what they told you at the real estate investor seminar (sic)?
You will see advertisements all over the internet by hard money lenders who say they will do 100% financing. Look out for email correspondence where a lender promises they are fast, entrepreneurial, aggressive on LTV, or low cash tolerant. These phrases are all red flags indicating a likely scam. These guys will demand an up-front fee and you will never hear from them again.