Perspectives From Hard Money Lenders

Private lending can be a great alternative for real estate investors and flippers. Hard money loans, in particular, can be an efficient and rapid way for borrowers to get the capital they need for high-potential projects.

Hard money loans (also known as bridge loans) may be offered by either an individual or a company. They are secured by real estate and are especially popular for investors and home flippers who need funds quickly or have had a credit history that may result in rejection by a traditional source of funds, such as a bank. Although rates may be higher than other types of loans, they afford borrowers more flexibility. Knowing where to borrow is critical, and word-of-mouth and personal referrals can help real estate professionals avoid costly errors.

As Julian Wrubel, Arizona-based Asset Manager of The Wren Group Inc., says, "Hard money as a niche is a necessity. The ownership, construction, improvement, and transfer of real estate is a core American value. Hard money fills a giant gap in capital markets that is not going to change."

How Has COVID-19 Changed Hard Money Lending?

Wrubel observed that the pandemic "squeezed everyone for a period of time" and his firm saw cuts and losses, but he is now busier than ever.

Renee Sall, a Managing Member of Santander RS, LLC, a New Jersey-based hard money lender, concurs. She observes that "the rates are coming down now since there is more money 'on the street' than ever before."

The end-of-summer housing market has been especially active. Inventory and rates are low, and people are moving to new areas based on lifestyle rather than job location. Flippers and investors are taking full advantage of these trends and seasoned hard money lenders are ready to help back new projects.

Borrowers Beware

Both Wrubel and Sall stress that borrowers need to be very clear on their objectives, do their homework about the areas in which they invest, and know and trust their lender.

Property assessment tools can be helpful to investors in targeting neighborhoods and properties, and for accurately estimating rehab costs. In markets where inventory is low, deals may come and go rapidly, and savvy investors must be ready to move.

"If you want to purchase something faster and without the bureaucracy of a bank, hard money is your friend,"  says Wrubel. But he cautions that "Investors must carefully analyze their buy and exit strategies properly." Lenders will be more likely to sign deals from people who are realistic and specific about their plans. 

"Borrowers who take a little extra time to present themselves and their plans will be viewed more favorably in underwriting, whether it's their first or 100th project," he adds.

Sall sees another angle. "Borrowers should hire real estate attorneys who specialize in hard money loans," she says. These professionals will be well-versed in local real estate law and can also protect borrowers from penalties in case construction runs late or an investor wants to pre-pay a loan.

"Trust the person or company you're borrowing from," Sall adds. "I've heard of lenders charging huge penalties to extend a loan just a few months if a project runs over. Get referrals." 

Rates and Terms Matter

Wrubel notes that single-digit rates are being advertised by some hard money lenders, but borrowers and lenders alike need to pay close attention to payback terms and penalties. 

Hard money loans are usually more expensive than conventional sources, but investors can move on deals more quickly. However, when projects take longer than expected or borrowers face cash flow challenges, they could be faced with unanticipated consequences. Both borrowers and lenders need to know and plan for these contingencies.

"Each state and municipality is distinct and each has its own parameters," notes Sall. When investors are buying outside their home state in high-potential markets, they need to do their research and seek experts in the community in which they're buying, building and flipping.