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hard money loans are making a come back in the real estate industry

Hard Money Lending: An Industry Growing Out of the Shadows

04 Aug, 2020

There was a time when hard money lending was considered to be the domain of shady characters—much akin to getting a loan from the mob. Today, hard money lending is actually becoming more popular, and growing out of the shadows. Real estate professionals, even those who deal with commercial real estate, are going to need to become accustomed with dealing with hard money lenders in the future, especially as the market shifts.

The “Loans of Last Resort” Becoming More Popular

A hard money loan is a loan that is backed by personal property and usually for less than 12 months. Furnished by private investors, they are known as loans of last resort because they are short-term, have high interest, and are usually acquired because the borrower can’t get traditional financing. The shorter terms of these loans are meant to mitigate risk, but some of the loans can be for three to five years, or even longer if the investor has an interest in holding long-term assets.

Like any financial tool, there are reasons for them to be used. Hard money lenders are frequently used during house flips, for instance. For the real estate agent, working with a hard money lender is actually barely an issue at all. The real estate professional will be able to get cash in hand for their client—there’s just potential for the deal to fall through. This is a because they aren’t going through regular channels, but instead operating at the whims of an investor.

The Reason for Hard Money Loan Popularity

It’s a tumultuous time in the financial industry, and real estate is often known as a safe harbor. As investors become encouraged to invest in real estate directly, they are more likely to engage in hard money loans themselves. As an example, Socotra Capital in Sacramento recently raised $158 million to invest in hard money loans. Meanwhile, buyers are turning to these loans either because they don’t have the credit to get other types of loans, or because they need a loan quickly.

Countering the Bias Against Hard Money Lenders

There’s nothing inherently shady about the practice of hard money lending. Hard money lending is just lending backed by real estate through private investors. Hard money lending has a negative reputation because it has been largely unregulated, and unregulated lending has a tendency to become predatory in nature. But companies like Ignite Funding have been working to make hard money lending more trustworthy. There is no reason, for instance, hard money lending through an investor cannot be just as controlled and beneficial as traditional mortgage lending.

For the real estate industry, how hard money lending is looked upon really depends on positioning. When it comes to buyers, hard money lending can be an interesting alternative, especially when it comes to larger commercial deals. As hard money lending becomes more popular and more reputable, it becomes a viable alternative to traditional lenders. But for hard money lending to become more popular and reputable, it also needs to become less predatory.

Because it is much harder for people to get loans during a tumultuous time, it’s likely that more hard money lending is going to be seen. It is growing especially fast in the area of jumbo mortgages, as many banks don’t want to take on the risk of providing these loans. Moreover, some loans are simply moving slowly. While the market still has to be viewed with some skepticism, it may eventually grow into a market that can be competitive with traditional mortgage venues.

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