5 Situations When a Hard Money Lender Could Give You a Helping Hand
Purchasing any property is a big undertaking. This is especially true when purchasing a house or commercial property as an investment rather than as a residence or business location.
Finding appropriate funding for a property purchase of any kind can be overwhelming, even under the best of circumstances. While traditional mortgage lenders can be an excellent resource in many situations, the restrictive underwriting model can pose logistical issues when you’re purchasing a property for investment purposes.
As all good investors know, transactions in the real estate world don’t always go smoothly. Sometimes, you need more money than you bargained for, the property you have your eye on is in poor condition, or you need to move quickly to avoid losing out on a potential deal. In these situations, and others that are described below, a traditional loan often can’t meet your needs. Instead of letting a great deal pass you by, there’s a better way. When you’re in a situation that requires speed, efficiency, and extraordinary funding, a hard money lender can be the asset you need.
When a Hard Money Loan Can Help
You are likely familiar with the concept of a hard money loan, but you may not know how or when to use this non-traditional lending solution to your benefit. A hard money loan can provide flexibility, short-term funding, and speed that traditional lending can’t, making it much easier to secure a property when the clock is ticking or you’re otherwise under pressure.
Still not sure when to pull the trigger? Here are a few situations when you may benefit from a hard money loan.
You’re Competing With Other Investors
Situation #1: You’ve discovered a great property with a lot of potential for your portfolio. However, other investors have come to the same conclusion and are now competing with you on the sale. You have enough cash for a strong down payment but cannot finance the whole purchase out of pocket. A traditional loan cannot be processed quickly enough for your bid to be competitive against bidders who can offer to close on an expedited timeline.
The real estate investment market is often a challenge, requiring a great deal of skill and knowledge to make wise investments. However, you’re rarely alone in seeking and finding these investment opportunities; if you think a property is a great buy, there’s a strong likelihood that other parties are interested as well. In these situations, speed is essential.
Traditional loans often require a lengthy approval process before the lender will close and pay out, taking from several weeks to over a month to provide you with the resources you need. Hard money loans move quickly, allowing for a closing in as little as 48 hours. By utilizing a hard money loan, your purchase offer can include an accelerated closing, which makes your offer more competitive because it provides the seller with greater certainty of closing than if the seller accepts an offer that is contingent on traditional financing.
Your Credit Isn’t Quite Perfect
Situation #2: Something went wrong, and your credit took a hit. You’d like to get back into the business of buying and selling properties, but with a compromised credit score, you may not qualify for traditional loans that meet your needs. You do not have the cash to fund a complete purchase, but the return that you can make on the prospective real estate investment exceeds the interest rates on a hard money loan.
Traditional lenders often have rigid underwriting requirements due to the conservative nature of their businesses, and rightfully so. Real estate purchases are generally extremely expensive, and mortgage brokers need to accurately assess creditworthiness prior to approving a loan.
Hard money loans are designed to work outside of conventional lending practices due to the private lending nature of these loans, offering lending solutions in situations in which traditional banks may not be willing to underwrite a loan. For example, there is no minimum FICO credit score in order to be approved for a hard money loan, providing you with a great alternative when your credit score does not meet the lending standards of traditional banks.
You Need Additional Financing
Situation #3: You already own a valuable property that you have borrowed money to finance. However, you need to make additional capital improvements or are facing complications that will require costly repairs to rectify. You do not want to take on the obligation of a second mortgage for property improvements, but you need a significant amount of capital in order to make the necessary renovations.
Many traditional loans are designed to cover the cost of your property and little else, so may not account for unforeseen improvements. Making appropriate upgrades to improve the value of a property is often a wise move, but your existing loan may not give you the cash flow you need to get the job done right.
Rather than jumping through the hoops that most banks require in order to obtain a loan in excess of the cost of the property, a hard money loan can provide the financing necessary to make the capital improvements you have in mind. For investors who see the potential in spending money to make money, hard money lending can take the conventional roadblocks out of the process.
You’re Flipping Properties
Situation #4: You buy houses, make both structural and cosmetic upgrades, and, when completed, sell them for a profit. In order to get the best deals on your properties, you need to move quickly and with all of the necessary capital in hand. As you do not plan to keep the property you are purchasing, you do not need a traditional mortgage. Additionally, banks and conventional lenders are unwilling to lend to you due to the condition of the properties you buy.
Flipping properties, when done correctly, can be a lucrative venture. However, the process often entails buying discounted properties in poor condition, which does not always resonate with traditional lenders. Most banks are willing to finance only properties that are functional, and many will hesitate to provide financing for a property that requires extensive improvements.
Unlike banks and mortgage brokers, hard money lenders are often willing to look past the surface of a property to see the potential underneath. In order to see big returns on your flip, it’s often advantageous to seize these opportunities, prioritizing a fast, short-term loan over the lengthy process that accompanies traditional lending.
You’re Constructing a New Building
Situation #5: You own a vacant lot that you are planning to build on. You know there will be a significant investment of capital to get your project underway, and you would like to start quickly. However, due to the nature of the construction process, you are not quite sure how much money you will need, or how long you will need it. When the building is complete, you plan to sell it for a profit, necessitating a short-term loan that will be easy to secure.
Ground up development can be a challenging investment to finance, especially if you’re taking a risk on a property. Traditional lenders consider many factors to determine the creditworthiness of a project, including equity, financial reserves, development history, timeline, and more. Deficiencies in one or more of these areas can mean immediate rejection, putting many potential developers on the outside looking in.
A hard money loan is often a way around these factors, offering funding for your project without the extensive underwriting that goes into traditional lending. After construction is complete, it’s possible to sell the property to pay back the loan or to seek traditional, lower cost financing for more permanent investments.
When it comes to real estate transactions, flexibility and creativity are often at the heart of a successful investment. In order to succeed in every venture, you need to know when to seek a traditional loan and when it’s time to get creative. A hard money loan can be a significant asset when you need to move quickly or are otherwise unable to obtain a conventional loan, giving you the freedom to build your portfolio and enhance your property holdings without hassles, hoop-jumping, and heartache.
Scott Clift is a licensed real estate broker with Westpark Equity Group and the private lending division of Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574-LOAN or by visiting westparkloans.com.