Pros/Cons of Hard Money Lending?

Question

I've been combing through a lot of hard money loan questions people have been asking the past few years and a lot of the questions often come from the perspective of someone trying to obtain a hard money loan. I know this website/forum primary focuses on real estate investing in homes, multi-family, commercial etc.. but I'm going to ask a question coming from the perspective of the hard money lender (I'm not actually a lender)

• What are the pros of being a hard money lender?
• What are the cons of being a hard money lender?
• If one of clients (the person your lending money too) declares bankruptcy can you (as the lender) lay claim to the property because it's an asset-based loan? or the fact that it's an asset-based loan does not matter and you can't legally claim ownership of the property
• I know this question is local specific but whats the typical APR on an hard money loan?

Jon Holdman · Answer

Pros are the interest you receive and the security of the property.  Rates are typically 12-18% with 3-6 points.  The broker I work with charges 15% and four points and loans are typically nine months maximum.

You cannot keep 100% of the money working 100% of the time.  For one, you will always end up with some leftover amount that's too small to make another loan.  And you will have downtime between when one loan pays off and you get the money back out.  So, don't translate 15% and four points for nine months into collecting 15.25% on your money every nine months.  That would be nice, but an overall return more like 10-12% more realistically accounts for the downtime and leftovers.

Risk is default.  I've had it happen.   My partner and I took a big loss on the sale (bad location next to a high school, sparse comps, and unpermitted work we had to correct) but did receive interest for eight months, so only a small loss in the end.

If the borrower declares bankruptcy you would be a secured creditor.   You should be protected, but who really knows.  In our case, the borrower gave it back with a deed-in-lieu.  Any sort of pre-signed quit claim won't stand up in court.  We require the borrower personally guarantee the loan, so we could have gone after him.  We choose not to do this because they handed it over without any fighting.  Had they forced a foreclosure or declared bankruptcy we would have gone after him.

Had they forced a foreclosure we would have gone through the process.  Hired an attorney, filed the notice, and taken it to sale.  Its possible that someone else would have bid on it and paid us off.  Then they would have had the house but we would have recieved all our cash, so that would have been the better outcome.   But with the amount we were owed, the costs of the foreclosure, and the issues with the property because of the unpermitted work (which the city was well aware of) then it was unlikely there would have been any bidders.

Curt Davis · Answer

Pro's - receive high interest and money secured my the real estate at a deep discount.

Con's - borrower defaulting

I would think if the borrower declared bankruptcy you would already have a reverse quit claim deed in place to take back the home, your in the first position lien on the property.

3%-5% loan origination fee and 12% - 18% annualized interest.

Gary O. · Answer

It seems that the hard money lender needs to be a good judge of character as well as an expert in the value of property. In that regard I would assume (yes, that dangerous word), that the hard money lender also has his good name to protect and in that manner would rather that all things went as the agreement was made.

Though certainly not the most economical or ideal long term arrangement, if time is money and loans take time this could be the only fast enough money for some urgent deals.

Shane Mcc · Answer

@Curt Davis

Con's - borrower defaulting

I would think if the borrower declared bankruptcy you would already have a reverse quit claim deed in place to take back the home, your in the first position lien on the property.

>>>>>>>>

Is the borrower defaults is it possible for you, as the lender to somehow not get the home?

Pros/Cons of Hard Money Lending?

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