I was on some radio show last week, I can't remember which one, but the host started off with a question, "So David, what's with all these subprime hard money lenders?" referring to the current subprime mortgage miasma.
This question made me pause for a moment because subprime and hard money aren't necessarily the same thing, but most people think that. At least I think most people think that. Hard money can be subprime if the borrower has damaged credit, but they are not synonymous terms. And subprime is not necessarily hard money although it can be.
What exactly is "hard money" lending?
Hard money means it costs a little more, more down payment is required and the borrower has to pay it back soon. Real soon, like in three months to a year. At least in commercial hard money.
Hard money in residential loan is more often associated with a "foreclosure bailout" where the homeowner must refinance his current mortgage and all back payments to pay off the foreclosing lender, along with higher rates (the highest rates allowed in residential lending). In residential, hard money is in fact synonymous with subprime.
But in commercial, it's not.
Who wants hard money? For that question, I asked my friend Vince DiMare who is the Principal for Equity Secured Capital in Austin, TX, who is a real, live commercial hard money lender.
"I've never really liked the term 'hard money' and avoided it for a while, but then everyone refers to what I do has having hard money so I started using the term on my website and business cards," said DiMare.
Hard money lenders don't come and break your nose if you don't pay your mortgage on time. And there are definitely places and times where hard money works for the borrower.
"My niche is a builder or developer that is property rich but cash poor and needs an immediate influx of cash to finish off his project. Once the project is completed and sold, I get my money back. As long as I can see a clear exit strategy, meaning how the borrower is going to pay me back, we can usually close these deals in a matter of days."
Short term is very short term in commercial hard money, usually 90-180 days, although you can borrow money longer than that, it's usually not much longer. But hard money fills a need.
DiMare said, "I'm in between what a bank would lend someone directly, but much less expensive than if the borrower had to bring in a partner to help finish off the project. Hard money isn't for everybody but for those who understand it, can pay it back and I can see their exit strategy it's a nice fit."
Hard money means it's more asset-backed and less income-backed. That's why many commercial hard money deals can close in just a few days instead of several weeks for regular commercial deals, because income isn't usually verified but the property along with the deal itself is analyzed thoroughly.
Asset-backed means low loan to value, borrowers typically need to have at minimum 35 - 50 percent in equity in the deal before a hard money loan can be placed. Hard money commercial also doesn't mean "bad credit okay." While a hard money commercial deal might have some damaged credit, bad credit and hard money commercial aren't the same.
