Hard money loans have been a tool used by real estate investors since investing began. These are not your standard 15 year or 30 year mortgages with fixed or adjustable rates. They’re short term money loans using real property as collateral. Investors use them primarily in flipping deals, as their interest rates are higher than other funding, adding costs, and requiring short term payoffs.
In the heady market days when properties were being purchased, rehabbed and flipped in days to weeks for a handsome profit, hard money lenders were popular and made a lot of money as well. These very short term loans would fund some or all of the purchase, the rehab work, and be paid off at closing when the property was sold. It has been a win-win situation for the real estate investor and the hard money lender as well.
If there’s less flipping going on, how can hard money loans become more important? With the housing market and mortgage industry troubles beginning in 2006, there has come an enormous tightening of lending standards. Real estate investors are having to devote more time and effort to funding their deals, whether for a flip (still happening) or for long term rental properties. Sometimes longer term funding is available, but only after a “seasoning period” of ownership showing solid rental income. When this is the case, a hard money loan can help to bridge the gap.
The real estate backs the hard money loan, and these type of loans are being used more frequently to fund business operations as well as real estate investing. With this new importance in the marketplace has come new scrutiny, and a new Code of Ethics for private hard money lenders. The American Association of Private Lenders (AAPL) developed this Code of Ethics to include stipulations about strictly adhering to all related real estate lending laws, nondiscrimination in lending, and honesty in all dealings.
For real estate investors, hard money lenders are a resource and profit tool. When short term funding can make or break a deal, a list of local hard money lenders can make the difference.