Can Hard Money be considered Cash?

Question

I'm a newbie so bare with me here. Any help would be greatly appreciated. Thanks in advance.

Example:

Seller wants $100k cash for property. We agree on a deal and I put down $10K as earnest money. After a thorough inspection and due diligence I agree to buy the property and get a hard money loan for $90K to pay the balance.

Is this possible?

Mike H. · Answer

@Travis Sperr is definitely correct. Hard money loan is not cash. Someone above mentioned that all the seller cares about is that there is money at the closing. No. Thats definitely not true. The reason a seller cares about the difference of an offer for all cash versus one that needs financing is that an all cash offer means the buyer has the money in their bank and nobody can tell them they can't use it.

An offer with financing is one that - even if the lender says you're approved - the lender can still decline you at any time for any reason up until the moment of the closing date.

And, to travis' point, an offer as cash will be treated differently than one by financing. So if you put in an offer as cash and then try to get a loan on the deal, you're out of luck. The buyer can pocket your earnest money and tell you to go pound sand. That being said, the seller may just say, yea, thats ok and sign an addendum to switch the agreement to allow the financing.

Hard money is financing. That being said, when you put your offer in, you can definitely do some educating of the seller as to what your offer looks like with hard money.
1) They will close in 2 weeks if needed.
2) You don't need any financing contingencies
3) They don't care about the condition of the property (i.e. like an fha, etc) and typically they're commercial loans so they don't have to follow all those new residential guidelines for contracts and the like.

There are a ton of benefits that using a hard money lender can provide that should set your offer apart from a financing offer. But the bottom line is you can't put your offers in cash if you're using hard money. Not unless your hard money lender is ok not recording the deed on the property at the time of the purchase closing...... :-)

But a good example of that is auction.com. Most of their auctions say they are cash only. But I have done two of those where I contacted the listing agent and told them I was using hard money and I could close regardless of the condition. Ultimately, it turned out that was the reason the auctions were cash only. The seller felt no conventional lender would finance the deal.  But when I explained my track record and how hard money is fine with stuff in inhabitable condition, they gave me the ok to put in an offer and I've picked up two that way.....

So even though hard money is NOT cash, that doesn't mean you can't educate the seller so they get the same warm and fuzzy that its fairly close to cash. You just can't put your offers in as cash.

Travis Sperr · Answer

Hard Money is not cash - here's why - the title company's job is to follow the instructions of the transaction i.e the contract. If the contract says cash - the title company will not provide lenders coverage or accept the lenders docs. Hard Money Loan is in fact a loan, unless your lender doesn't require title insurance or the docs to be executed and recorded by the title company... very unlikely.

If you are working with an individual, or with the seller direct it likely isn't an issue to amend the contract to financing. An REO or auction site and they may not allow a change from cash to financing.

Don't make cash offers if you don't have the cash - it will either be embarrassing when the seller requests a proof of funds or you will lose your earnest money when you cant perform.

Travis Sperr · Answer

@Qwesi McCray it all depends on the value of the property, assuming it doesn't need a lot of repairs or you are not buying significantly under value, with an opportunity to add value/increase value then hard money is not a good fit. Hard Money is generally high leverage financing on the after repaired value, typically not high leverage on an asset that doesn't have a value add component, so this scenario probably doesn't work.

Further you could run into issues of getting financing when you are not in the market you are looking to do business in.

Qwesi McCray · Answer

@Mike H.! Thanks for the thorough response. I get it now.@Travis Sperr you are the greatest.

I have a lot to learn obviously. I love that Biggerpockets gives you a platform to ask questions like mine and get answers in minutes. Love this place.

Karen Morison · Answer

Sure, the seller just cares about getting their money at closing.  So yes, it would be considered "cash." Remember, "cash" to a Seller means that you will have the money on hand when you put in an offer on the house and that you're guaranteed to be able to buy the property, and without waiting.  As a Seller I'd want proof of funds, that the money is in your bank account, before I accept your offer.  I assume you would flip such a property?  As you likely know, holding onto a hard money loan for any length of time is hugely expensive, especially when regular loans are fairly easy to do, given good credit, etc.  Since we're talking about hard money loans, be very careful to do them on properties where you are really certain you can do the renovation work fairly quickly.  Don't do it on one of your first properties because you wouldn't have enough experience to know how quickly the work could be done (no matter what your contractor might tell you).  -- Best of luck.

Shannon K. · Answer

Who is the seller?

Is this a private seller you found yourself? If so, why are you considering giving them $10k? I wouldn't give anyone actual money unless it was an attorney escrow account for that amount. Maybe a small monetary consideration-- $50 for "formality" perhaps. In a private setting, things are more negotiable I'd say and a seller should be fine with a quick-close hard money loan (but its likely they've never heard of it before, so I tell my potential people its an investment/partner loan so they understand).

If its a bank-owned or listed property, hard money is "technically" same as cash, but I have been marking the "new loan" box each time when submitting offers to banks. I'm thinking about changing this strategy though and marking it as "all cash" since my hard money offers have all been rejected from banks so far!

Joseph Ghobrial · Answer

Hey all,

While a hard money loan is not cash in the strict sense, it is accepted when a post says "cash only". For instance, Auction.com says cash only, and in the details below includes a hard money loan under the "cash only" category, aside from cash.

Qwesi, when you put in an offer, simply tell them you have a hard money loan, emphasize it is fast closing within 10 days (if your hard money lender can deliver in that timeline).

Thoughts?

Founder, Refix Real Estate

Qwesi McCray · Answer

Thanks a lot @Travis Sperr.

What about this... Last week I found a cash flowing 8 unit in Pennsylvania for $120K. I'd need a commercial loan and that requires 25% down, but I only have 15%. Assuming I have no friends or family to help make the down payment I could potentially buy the property using a private lender then refinance the loan with a portfolio, right? I get the hard money loan rates will cost me upfront, but the cash flow would pay for that until I refi.Quick back story, my wife and I plan to start investing come August when we start our new gigs. So this is not something I'd try to pull off tomorrow. Just looking for creative ideas for the future with hard money/private lenders I've found online.

Thanks

Qwesi McCray · Answer

@Shannon K. and @Karen thanks a bunch.

The scenario above was hypothetical. I'm just exploring possible creative financing for the future. I've noticed many listings where sellers want "cash only buyers" for turnkey cash flowing multi-family properties. I've found private money/hard money lenders who say they'd carry my loan for 6-12 months until I'm able to refi. I have the credit to get a conventional loan now (credit score about 720). Refinancing shouldn't be a problem for me when the time comes. I plan to start investing once my wife and I start our new jobs in August. But i'd hate to miss out on a great deal, because I don't have enough money for an all cash deal. No cash-out needed, just refi to get the hard money loan paid off. I've found portfolio lenders who will refi with no seasoning.

If you have any other ideas on how to work out an all cash deal, without all the cash on hand, please share. Thanks again.

Qwesi McCray · Answer

@Tim Porsche, thanks for the reply.

The example was hypothetical. I'm just interested to know if hard money can be considered cash in a situation like this. Would a seller be okay with this? From what I gather sellers want to do cash deals, because they want their money ASAP. Some asset lenders advertise financing loans in 4-5 days, without the hassles of the average conventional loan.

Can Hard Money be considered Cash?

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