What’s the biggest reason you DON’T use hard money?

Question

I recently started working on the lending side of real estate, and I’m curious what investors actually think.Is it the interest rate? Points? Short loan terms? Bad experiences with lenders? Or do you only use hard money when a deal absolutely requires it?

I work with investors doing flips, rehabs, acquisitions and bridge loans, so I hear the lender side all day but I’d rather hear the investor side. What would make you choose one hard money lender over another?

David Krulac · Answer

Bought 3 properties last year from a builder, at 4.25%, 4.25% and 4.75%. Why would I pay a hard money lender 12 to 15% when I can get a fraction of that for long term. Recently saw a builder offereing 3.85% interest. I don't have any mortgages above high 6%, why would I go for hard money?

David Krulac · Answer

@Bre Norris There are many sources of money, to me Hard Money is near the bottom of the list. It is above rob a convience store, however. I've gotten no collateral lines of credit. Credit Unions often offer such a product, used many times for down paymets, and rehab money. Second mortgages, HELOC, and other collaeralized loans are available. One time I had some imdividual stock (I don't own any individual stock now, but did formerally). and I used the stock to get a loan using the stock as collateral from a bank. Borrow from some one who loves you, family or friend, done that as well. Borrow from somebody who has money in a low interst bearing bank account, retirment fund, IRA, 401K, etc. And this only a partial list off the top of my head.

Igor Ganapolsky · Answer

Hi Bre, good question. I buy properties at county tax deed auctions in Florida, which means all-cash purchases - there's no financing option at the auction itself. So hard money isn't even on the table for my main strategy.

For conventional deals though, the main reason I avoid hard money is the cost. When you're paying 10-15% interest plus 2-3 points, that's a lot of expense to absorb. The deal needs to have enough margin built in to make those numbers work. If I'm buying a rental property and the cash flow is tight with a conventional mortgage, adding hard money costs on top of that usually kills the deal.

I'd rather build my cash reserves over 6-12 months and buy what I can afford than rush into a deal with expensive money. The speed benefit of hard money is real, but I haven't found a situation where losing a deal over a 30-day closing timeline was worse than paying $15-20K in interest and points over 12 months.

That said, I can see the value for fix-and-flip investors who need to move fast and have enough spread between purchase price and ARV to cover the financing costs. But for buy-and-hold rentals, the math rarely works for me.

Diana Khan · Answer

@Bre Norris, from working with investors, I’ve seen that the rate is only one piece of it. What usually matters just as much is how clear the lender is about the full process before the borrower signs anything.

Investors remember the lender who explains the draw process, extension terms, fees, and what happens if the project takes longer than expected. I’ve seen deals where the financing looked fine at closing, but the stress came later because the borrower and lender had very different expectations about draws or timing.

I’d be glad to stay connected, @Bre Norris. I like hearing the lender side too because the best relationships I’ve seen are the ones where everyone knows what to expect from the beginning.

Robin Simon · Answer

One thing you didn't mention which is meaningful in the market is the valuation methodology, since there is a wide spread of Hard Money Lender policies on this, ranging from full third-party appraisals to no appraisals and internal valuations only, which "desktop appraisals" or in-between options too. Can make a lot of difference in speed etc.

David Krulac · Answer

@James Mc Ree funny you should mention that. I put an offer in on a place that was listed at $650,000. The seller hadn't gotten any offers, so I offered $500,000, cash, settle in 30 days, no financing contingency, no appraisal contingency but an home inspection. After the seller agreed to my offer they got a bach up offer for $600,000, so two parties were cheering for me to not close, the seller and the backup offer. I didn't have $500,000 cash but di apply for a mortgage and was able to settle with 80% LTV bank loan in 30 days and got the deal. Just recently that property just sold for $1,275,000, not by me I had sold for for $830,000.

James Mc Ree · Answer

HM loans seem to be for investors who don't qualify for cheaper funds. I've considered, but never used HMLs. I heard it described that HM lenders:

• 1. Work faster than traditional lenders which is valuable when time is of more essence than usual.
• 2. Require less documentation.
• 3. Are more flexible.

1. Work faster than traditional lenders which is valuable when time is of more essence than usual.

2. Require less documentation.

3. Are more flexible.

I personally haven't had a deal opportunity in which I had to close in less than 30 days or I lose the deal though I am sure it can happen. DSCR lenders usually can close within 30 days. Greater flexibility and less documentation are valuable for less qualified borrowers, which ultimately drives up the rates and points. To @David Krulac's point, if there isn't extreme urgency and the investor is well qualified, why go the HML route? Lower doc requirements can get very expensive that way.

What’s the biggest reason you DON’T use hard money?

What’s the biggest reason you DON’T use hard money?

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