In 2007 and 2008, the mortgage market took a hit that mimicked the gigantic Wall Street downturn. Even now capital markets continue to lack confidence in real estate lending and banks, who are not immune to the damaging effects all of this lost investment and real estate value, aren’t creating “make-sense” real estate loans.
But there is a bright spot for people who want to invest in or borrow against real estate. This bright spot can be found in a little know niche in mortgage lending called private real estate collateralized (or “hard-money”) loans, which are also referred to as private money lending.
Private, hard money lending is a highly specialized segment of the mortgage finance industry that provides an alternative source of financing and fills the tremendous void in today’s capital starved real estate lending market.
Private money lending enables individuals and businesses to acquire real estate and property owners to leverage equity from residential and commercial properties, all without involving traditional lending institutions. This can help fulfill working capital needs and is an innovative way to fill any credit gaps that might be experienced by individuals and businesses.
One of the most powerful benefits of private money lenders is that the lending process is based on a private investor’s needs, concerns and requirements rather than an inflexible, cookie-cutter lending institution’s. Instead of making decisions with the use of a committee, private money lenders make decisions alone. While a certain amount of due diligence must be done, private money lenders are able to assess and respond to the underwriting needs as soon as they are provided by the borrower. As individuals, they have the means to respond to a borrower’s sense of urgency and can fund loans within a matter of days, whereas traditional lending institutions may take weeks or months. Private money lenders have the added flexibility of avoiding certain regulatory constraints and internal processes that traditional lending institutions can do nothing to avoid. This allows private money lenders to solve problems and think outside the box. Lastly, because they are answerable to their own wallets instead of the wallets of shareholders, private money lenders are not stuck with predetermined loan terms and yields to maintain—as only they need to be satisfied with the return on the loan.
With a higher than average equity requirement of 35%-50%, hard money loans provide borrowers with greater flexibility and fewer restrictions and red tape than institutional financing. Primarily, hard-money lenders base their decisions on the quick-sale value of the property, its marketability, the borrower’s exit strategy and ability to repay the loan.
In part two of this series, we will discuss in detail how these loans work and in part three, we’ll talk about underwriting.