Why Is It Called “Hard Money”?
The “hard” in hard money refers to the hard asset securing the loan: real estate.
A traditional residential mortgage focuses heavily on the borrower:
- Income
- Employment
- Credit
- Debt-to-income ratio
- Assets
- Ability to repay
A hard money lender may put considerably more emphasis on:
- Property value
- Purchase price
- Equity
- After-repair value
- Renovation plan
- Borrower's experience
- Exit strategy
That does not mean hard money lenders ignore the borrower. It means the property and transaction often carry greater weight.
Why Use Hard Money? Common Situations
Typical reasons:
- Fix-and-flip
- Distressed property
- Fast closing
- Auction
- Renovation
- Temporary financing
Why Is It More Expensive?
The lender is taking a different risk and often offering:
- Faster decisions
- Shorter terms
- Property-based underwriting
- Flexible transaction structures
Exit Strategy Is Everything
Before borrowing, know:
How does this loan get paid off?
Possible exits:
- Sell property
- Refinance
- Complete renovation then refinance
- Receive other funds
Buyer Warning
Do not choose hard money simply because it's “easier to qualify.”
Understand:
- Interest
- Points
- Fees
- Maturity
- Extension costs
- Default terms
Why Would Anyone Use an Expensive Loan?
Because sometimes speed or flexibility is worth more than the interest rate.
Illustration only
An investor finds a distressed Las Vegas property for $300,000. The property needs substantial work and may not meet the condition requirements of ordinary financing.
Purchase$300,000
Renovation$80,000
Potential renovated value$500,000
A conventional lender may not finance the property in its current condition, or may not close fast enough to secure the opportunity. A hard money lender may be willing to evaluate the deal based partly on the property's value and renovation plan. The investor accepts expensive short-term financing because the plan is to renovate and then sell the property, or refinance into longer-term financing.
Hard Money Is Usually Bridge Financing, Not Forever Financing
This is one of the most important concepts.
A hard money loan is commonly designed to get the borrower from:
Point A: acquisition / problem property
to
Point B: sale or permanent financing
It should generally have an identifiable exit.
What Does Hard Money Cost?
Terms vary substantially by lender and market. Hard money may include:
- Higher interest rates than traditional mortgages
- Origination points
- Processing or underwriting fees
- Appraisal and valuation costs
- Extension fees
- Draw fees for renovation funds
- Legal and title costs
- Possible prepayment provisions
Do not evaluate hard money using the interest rate alone.
Ask: What is my total dollar cost if I hold this loan for 3, 6, 9, or 12 months?
What Is a Point?
One point generally equals 1% of the loan amount.
Example
Loan amount: $400,000. Two points: $8,000. That can be charged in addition to interest and other costs.
What Is After-Repair Value?
After-repair value, often called ARV, is an estimate of what the property may be worth after planned renovations are completed.
Hard money and fix-and-flip lenders may consider current value, purchase price, renovation budget and ARV. But ARV is still an estimate.
If the finished property sells for less than expected, the lender does not absorb all of that investor risk.
What Is the Exit Strategy?
Before using hard money, answer: How exactly am I paying this loan off?
Common exits include:
- Renovate and sell.
- Renovate and refinance.
- Sell another property.
- Complete construction and obtain permanent financing.
“I'll figure it out later” is not an exit strategy.
What Can Go Wrong?
Plenty.
Renovation takes longer.
Contractors disappear. Permits take time. Materials get delayed.
Renovation costs more.
An $80,000 rehab becomes $125,000.
ARV was too optimistic.
The investor expected $600,000 but the market supports $525,000.
Market changes.
Inventory rises or buyer demand weakens.
Refinance fails.
The property is finished, but the borrower cannot qualify for the expected permanent loan.
Loan matures.
Short-term loans have deadlines. Extensions, if available, can be expensive.
Is Hard Money Bad?
No.
It is a tool.
For the right investor and transaction, it can make an otherwise impossible deal possible.
For an inexperienced borrower with no reserves and no clear exit strategy, it can be dangerous.
How Lisa Helps
Lisa can help investors evaluate the real estate side of the transaction:
- Comparable sales
- Likely resale competition
- Property condition
- Neighborhood demand
- Potential resale positioning
- Purchase negotiations
- Estimated renovated marketability
The lender determines financing, and contractors determine actual renovation costs. Those should remain separate analyses.
