Private Hard Money Lender
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A private hard money lender has a profile that includes being a local area loan provider, an entrepreneurial type, having the stomach for risk and a penchant for tough negotiating. This cash provider will typically lend money based on knowledge of a local situation. For example, if a business in the area suddenly gets into financial trouble, the hard money loan provider will probably have known about the business for years and have some firsthand knowledge about the owner or perhaps workers at the business. Often times private lenders of venture capital have a strong community spirit and want not only to make a profit but also to strengthen the local economy through the application of venture capital. In this case, the cash provider will negotiate a loan to the business, usually for three years or less and at an interest rate set by the loan provider.
In most cases, the private hard money lender will charge much higher interest rates than those charged by a bank. The reason for that advantage is because in most every case, the borrower already has financial difficulties and may be a borrowing risk. In the case of the local business cited above, it is simply a pay it or shut the doors deal for the owner. The hard money loan would be a seventy percent asset based lending agreement, meaning that the building(s) and equipment would become the collateral for the transaction. This seemingly low loan to value ratio gives some extra security to the lender in case of a bankruptcy or foreclosure.
In the case of the distressed company, the private hard money lender structured the loan in such a way that he funded seventy percent of the needed money, and the borrower put up his personal home's equity for the remaining amount. This second factor of a personal property lien was very important to the hard money provider who saw it as an extra incentive for the borrower to make good on a recovery plan. Since the private cash provider can structure the loan in any manner of his choosing, the request for the borrower to put up personal property as a lien is not unusual. Many people use the phrase, "everything has a purpose" with a shrug of the shoulders, meaning they hope that is true. The Bible says for the Christian that is an absolute truth when it reminds us, "And we know that all things work together for good to them that love God, to them that are the called according to his purpose." (Romans 8:28)
In the case of the real estate developer, the private hard money lender is often the most integral part of putting together a multimillion dollar land development transaction. Again, the use of a local private lender is essential because of the personal knowledge this individual will have regarding the property under discussion. For example, a prime piece of property such as a farm suddenly comes on the market, or is about to do so. A developer gets wind of its existence and knows that the property will be a fabulous location for high market home sites. The developer approaches a private hard money lender living within twenty miles of the potential property who is well aware of the land under consideration. The lender believes in the developer's potential plan and agrees to a seventy percent, one year loan at twenty two percent based on the appraised value of the land. But that's not all because the loan also includes a three point origination fee that in this case amounts to about forty thousand dollars.
But the developer then has a down payment on the property and enough cash to put in roads and utilities to start construction. The private hard money lender has none of the restrictions that a bank has on it when crafting lending agreements so it becomes critical for the borrower that an attorney look over every legal document signed with the lender before signing. Sometimes a developer is looking for a bridge loan to cover remodeling expenses for a worn down strip mall. A private hard money lender is often willing to provide sixty to seventy percent of a property's value and not call for the loan to be repaid until the property is fully redeveloped and resold or up and running at full capacity. Because of its close proximity local lenders are far more willing to invest in projects with which they are personally aware, as in the case of the strip mall redevelopment.
The term hard money refers to the very strict guidelines under which cash is lent. In some cases a private hard money lender will not care about a person's credit score, but will not be sympathetic to a borrower's inability to handle the loan wisely or the failure to pay back on time. Even paying a loan off ahead of time is often met with financial penalties drawn up in the lending agreement. The use of hard cash is costly, much more so than from banks, but one of the advantages is the very quick turnaround time in receiving it. Soft loans from banks may take thirty days or more to receive, and in the meantime a prime property or opportunity may vanish. The hard cash lender, if he so desires can go to his bank and withdraw the funds in hours or a few days and a prime opportunity is saved. To find a hard cash resource, talk to mortgage houses, title companies and real estate agencies.
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