Private money, sometimes referred to as ‘hard money’ is a type of lending that doesn’t cater to nor fit the traditional lending guidelines. And it’s not supposed to. The common reference of ‘hard’ money is due to the nature of the loan itself. Hard or private money is so-called because the terms are much more  onerous as it relates to rates and fees. Rates can be pretty much anything the lender desires. 8-9-10% even. Or higher. Origination and other lender fees are also added on top of these higher rates.  A bigger down payment is most always required.  Finally, private lending is also reserved for investor properties, not owner occupied units. So why in the world would anyone take such a loan knowing the costs are so much higher than what is readily available on the open market? Here are three reasons why private money can make sense.

Quick Close

Because a private lender doesn’t have to go through the traditional approval process, a private loan can be funded in a matter of days, not weeks. For instance, a developer sees a property that is  in dire need of repair to the point that a bank won’t touch it. Or, a property is in some stage of foreclosure and the owners need to sell fast. In this instance, a developer could come in and buy the property ‘as is’ to keep the home out of foreclosure. The developer could then use private funds to rehab the unit to the point where the property can ultimately qualify for a traditional loan. It’s a win-win situation. The owners avoid foreclosure and gets the proceeds from the sale and the developer makes a profit when the home is repaired and flipped.

‘Subprime’ Situation

Another private solution is for someone that has damaged credit. Private  lenders typically don’t have a minimum credit score requirement, although some do, but instead rely on the notion that the property can be sold quickly after acquisition. A private loan can be used to finance someone that has a credit profile that fits ‘outside the box’ compared to traditional loans. There are no secondary markets for subprime loans so the lender needs to determine how and when and how the loan will be repaid. A private loan for someone with negative credit can be issued to finance a transaction that otherwise would have problems getting across the finish line. Again, the lender needs to be convinced the property will soon close as envisioned. Such loans also require a large down payment. 

Short Term Bridge

A bridge loan is one placed on an existing, listed property for the purposes of acquiring another. Traditional lenders aren’t all that keen on financing a listed property. A traditional lender wouldn’t really make anything off the issuance of the note because the loan will vanish once the home is sold. A private lender can consider a placing a loan on a home that is currently listed knowing full well the property will be sold. Again, the lender wants to see the ‘exit’ strategy, or the technicals of how and when the loan will  be repaid.