Hard Money financing provides funding for opportunistic acquisitions, quick refinancings, foreclosure retrievals, and other time-sensitive or unusual circumstances. This type of financing is almost exclusively originated by private money funds, and moves very quickly.
Due to the inherent uncertainty involved with this type of financing, Hard Money loans are more expensive than traditional financing. The term “Hard Money” carries a negative connotation, and for good reason. It does not come to a surprise that many Hard Money lenders try to disguise themselves as Bridge lenders. It is common for Hard Money loan pricing to fall in the 12-16% range, depending on the project’s risk level. Hard Money loans are also characterized by low LTV percentages.
Hard Money financing is often a last ditch attempt by borrowers to salvage projects. Ironically, from the lender’s perspective, the high yields make Hard Money a relatively conservative business. Extremely high pricing and low LTV ratios more than compensate for the higher loan default risk.
These loans are for specific situations where speed is of the essence and cash flow may be limited or altogether unavailable. For example, empty warehouses, unentitled land, and under-construction properties have value but no cash flow.
In acquisitions, Hard Money financing is used when a buyer needs quick funding to purchase low-grade commercial real estate. Opportunities for these acquisitions are often only available for short windows, and can carry unattractive qualities. Therefore, traditional permanent financing is simply not an option.
Hard Money is also used during construction periods. When additional funds are necessary for a project’s completion, Hard Money lenders extend a line of credit that they deem reasonable based on the expected sale price and/or revenue of the property.
In addition to construction and acquisition uses, Hard Money is utilized during refinancings, where timely funding is essential to preventing foreclosure. When firms acquire ailing loan portfolios, they must quickly obtain funding to save them from default. While fraught with risk, this practice of purchasing discounted loan portfolios can be extremely profitable, especially with favorable Hard Money financing terms.
Hard Money is a unique and powerful financing tool. It allows for borrowers to obtain funding for projects that would otherwise receive no lender attention. However, it comes with its fair share of risks, and stipulations.