Certain types of investments require significant upfront funds for acquisition. Real estate is the perfect example. So where do real estate investors get the funds they need to obtain new properties? Some go to traditional banks and private lenders. But even at that, traditional lenders have been known to back out at the last minute. Then what? Investors often turn to hard money.
Hard money is so named because lenders require a hard asset as collateral. That is generally not a problem for real estate investors inasmuch as the properties they are hoping to acquire through hard money financing act as the collateral. Investors do not have to come up with something else as long as said properties are valuable enough.
Why Banks Back Out
It can be terribly frustrating to have a bank back out a few days or weeks prior to closing. The closer a deal is to closing, the more difficult it is to arrange new financing. And if new financing cannot be arranged, the investor could lose the deal. That’s one of the reasons so many turn to hard money lenders.
Before explaining why, have you ever wondered what would make a bank back out of a lucrative investment deal? It could be any number of things. Maybe the property appraisal didn’t come back as high as anticipated. Perhaps an underwriter found an error in the borrower’s documentation. Whatever the particular reason, it is always a matter of risk. Something about the deal suddenly seems too risky for the bank.
The unfortunate thing for investors is that they often find out pretty late in the game that a bank is going to back out of a deal. They are left scrambling to arrange another financing partner before closing. That takes us back to hard money.
Hard Money Lenders Work Quickly
Speed is one of the biggest advantages that hard money brings to the table. That is important when you are talking about a commercial real estate deal destined to collapse if an investor cannot arrange alternate financing quickly enough. The bank backs out and the investor has just days to come up with a new source of funding.
How quickly do hard money lenders work? Speed differs from one to the next, but it is not abnormal for lenders to approve and close deals within 24 hours – at least when conditions warrant. Every hard money loan doesn’t close that quickly, but 24 hours or less is possible if the need arises.
Salt Lake City’s Actium Partners faced that sort of need a few years back when a local bank backed out on one of their clients. The client reached out to Actium on a Friday morning. That afternoon, Actium had boots on the ground appraising the property. Approval was given and the team back in the office prepared paperwork before the close of business that day. On Monday morning, they forwarded both funding and documentation to the title company.
Because Actium was able to act so quickly, the deal was saved. Closing had already been scheduled for that Monday morning, so any approval or funding delay by Actium could have easily scuttled the closing – and possibly the sale as well.
Hard Money Saves the Day
Hard money is often described as a lending option of last resort. While that is not true entirely, one could make the case that it’s true when an investor’s bank backs out at the last moment. Thank goodness hard money lenders can work quickly enough to save deals before they are lost. When banks back out, hard money saves the day.
