While private or “hard” money lending companies may seem like one of the last places where an inexperienced investor should look, they actually provide a neutral and non-threatening platform where borrowers and lenders can meet each other and appraise their mutual needs. Still, many of the same questions that arise in a traditional investment setting are applicable. Here are just a few that every investor should ask:
Hard Money Lending Question #1: What's the risk/reward ratio?
The average return on hard money loans is definitely higher than on traditional ones. This is good news for the lender but the borrower will also see benefits. In particular, they are dealing with a much more responsive and less “fee-heavy” lender. In other words, they can get their loan in a much timelier manner and with less hidden costs – both of which save them money.
Hard Money Lending Question #2: What is my security?
Private money deals are structured on the same basic terms as traditional real estate loans and use all the same documentation. In particular, appraisers, inspectors and escrow accounts are used as well as title companies and attorneys.
Hard Money Lending Question #3: What if something goes wrong?
Nothing is ever guaranteed but you will have the same legal recourse as in any traditional real estate deal. In addition, hard money deals are usually made at relatively low “loan to asset values” which protects the lender to a significantly greater degree than a standard loan since they can sell the property at a loss to the original buyer's price and still recoup their investment.
Hard Money Lending Question #4: How do I exit a marginal deal?
There is never a great time to exit a deal early but private money lenders offer an excellent secondary market for investors who may be cash strapped or wish to pursue a more lucrative opportunity. The beauty of hard money deals is that they are usually high yield so an investor can still get most of their money out of any deal.
Hard Money Lending Question #5: How do I know that the investment is reputable?
Hard money lenders are in the business of bringing knowledgeable investors and borrowers together. To this end, they vet every deal and every individual who uses their services. This includes the specific deals, their terms, the investors and the borrowers but also the various ancillary people that are necessary for any real estate deal to be consummated.