Hard Money Lenders - Why do you not use them to leverage your deals?

[Ben Stoodley]

Hi All,

I have found the vast majority of Real Estate Investors do not use a Hard Money Loan as a source of funding their deals simply due to the fact that they do not know enough about the process. In the RE Investment industry, it can be very difficult to qualify for a conventional loan, especially in the flipping business. Given the competitive nature of the business, leveraging your deals and increasing ROI seems like a great way to strengthen your offers. So, my question is, what is the main reason you do not consider private or hard money loans as a viable option? 

Thank you all!

Ben

[J Scott]

My take:

HMLs will often talk about how, by use hard money, investors can scale their business from one or two deals per year to 20-30 deals per year.  In fact, the OP makes that same argument earlier in this post.

The issue with that reasoning is that any investor who has the experience, skill and motivation to do 20-30 deals per year likely has sources of money that are cheaper than hard money.  Personally, I borrow money at 10-12%, so there's no reason to spend 3-5 points and 12-16% that most hard money lenders charge; most other serious/experienced investors I know feel the same way.

Now, for newer investors, hard money might be a good alternative. The issue is that HMLs know that new investors are big risks, so the terms tend to be very skewed in the favor of the HML -- from the LTV to the rates to the conditions and due diligence process.

If more HMLs were willing to underwrite experienced investors and provide loans at rates more commensurate with private money, I think HMLs would find that they could ultimately make more profit with less risk.  But, that involves flexibility and creativity on the part of HMLs, two things we don't tend to see...