Myth: Hard money loans are so-called because the lenders and their terms are hard to be negotiated with or accepted.

Fact: The nature of this avenue of investment does indeed require that hard money lenders adopt a rather firm stance with regard to their qualification conditions. However, the “hard” in hard money actually refers to the ease, or rather, the difficulty of the project itself. For example, the property is difficult or the conditions of the transaction may be difficult. The borrower may even be a difficulty. These “difficulties” are referred to as hair. The hair that is routinely encountered is often implausible and sometimes even absurd, such as a hand-written loan request from the state penitentiary, for example. Every proposal is unique and must be evaluated to discover its own merits. Nevertheless, virtually every project proposal that’s received harbors at least one or more of the following circumstances: money is needed quickly, often within a week; the borrower has little or no cash equity, and cannot raise a sufficient amount or is not willing to sacrifice an equity interest in the project to an equity investor; the borrower has a history of bad credit; the borrower has tried for several months without success to obtain financing; the project itself is problematic or has significant questions; there is no exit strategy for the loan.

Myth: Hard money loans are excessively expensive.

Fact: If the loan was easy or worthy of less expensive pricing, the borrower would likely not have sought hard money to begin with. The pricing quoted by the lender is usually commensurate with the circumstances and the risk involved. Hard money loans are usually a blend of debt and equity risk; priced higher than conventional debt but less than the cost of equity investment.

Hard money loans are actually priced just like any other loan. If a Fortune 500 lender were offering a quote on the same loan, their pricing would be very similar. The difference is that it would not be referred to as “hard money” simply because of the status of the lender. Therefore, a borrower seeking quotes for comparison on a hard money loan will generally find the competitive proposals to be priced very similarly. The final choice, then, should be based on the lender’s reputation and ability to close, the conditions associated with each proposal, and the chemistry between the two parties.

Myth: Hard money lenders are disreputable loan sharks.

Fact: Most heads of hard money lending firms have successful backgrounds as investment bankers, real estate developers, lawyers or accountants. They realize that their bread-and-butter is closing loans, and a bad reputation is extremely counter-productive to that. With time being their most valuable commodity, hard money lenders will usually state facts, quickly and bluntly. Savvy borrowers appreciate this approach and use it to better focus their project searches.

To be successful (read, profitable) hard money lenders must be capable of both assessing risk and closing loans. They are professional business people who understand the way the system works. They can be tough, but they can be fair as well. A prudent borrower, however, should perform his own research of the investor at an early stage in the relationship in order to minimize or avoid any potential problems.

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