The vast realm of real estate financing splits primarily into two leading paths: Hard money, which is anything but ‘hard’ to get, and Conventional Financing, which is very much what the term implies; standard, normal, regulated. Each path possesses distinctive features, appealing to different types of investors and scenarios. Understanding these can equip you for your investment journey.
Side Note: The author is both a hard money broker and licensed loan originator with the ability to write both types of loans.
Definition: HM is focused primarily on for business purpose lending with a heavy focus on an asset's value.
- Initial Inquiry: Investors will approach private lenders, often through a qualified broker who specialize in HM. To get a quote, only basics are necessary. Loan type and details sought, property, entity, and sponsor information get the ball rolling. Once you have a good quote and negotiations complete...on to step 2.
- Submission: This is a pretty light and straight forward process. Fill out a Guarantor app, property details, provide a personal financial statement, a purchase contract and scope of work when necessary, most times a credit authorization, and it is off to the races. The lender will probably order an appraisal and take deep dive into the property's current and future value (after repair if a fix and flip) and its potential for appreciation or revenue generation as a rental UNLESS they don’t require an appraisal. Nope, not a typo; some lenders only require a BPO or drive by appraisal.
- Rapid Decision-making: With the emphasis primarily on the property and because these lenders are generally loaning out their own money, HM decisions come swiftly, as in same day quickly once all the docs are in.
- Quick Turnarounds: The streamlined process caters to investors looking to secure properties in a hot market. Some asset based lenders have heavily accelerated programs allowing an investor to obtain financing, through funding, in as little as 5 days.
- Simplicity: Without an exhaustive examination of the borrower's entire financial history, roadblocks are minimized.
- No Ceiling on Properties: Whether it’s an investors third property or their thirtieth; property limits don’t tie anyone down (try that with a conventional bank). For full transparency, some HM lenders DO have an exposure limit for a single sponsor but that same lender will find it acceptable to exceed that limit with another lender.
Unique HM Financing Tools:
- Fix and Flips: Quick acquisition, renovation, and sale. The property's after-repair value often determines the loan amount.
- DSCR Loans: Debt Service Coverage Ratio loans are designed around a property's cash flow potential. It ensures the property's earnings can cover loan repayments.
- True Bridge Loans with Two Properties: A boon for those in the transition phase between two properties, leveraging both a new asset and a former until the former is sold.
- Single Property Bridge Loans: These are like a speedy purchase loan, sans the rehab. Essentially for investors who spot a property they believe is already primed for resale or rental. They are still quick, still have no prepayment penalty, and are tailor made for the professional investor.
- Ground-Up Construction Loans: Starting from scratch? This loan type supports investors from the initial groundbreaking right up to the final touches. These will require more experience that the rest of this list, but once that is achieved, sky’s the limit.
- Lines of Credit: Like a financial Swiss Army knife, it offers flexibility, available as and when needed, especially useful for multiple transactions or sudden expenses.
2. Conventional Financing
Definition: Rooted in tradition, this avenue delves into the investor's financial health, often looking beyond just the property.
- Application: A thorough examination kicks off with a comprehensive look at the investor's financial history, real estate schedule, and a very extensive application that includes the necessary and not so necessary.
- Layered Review Stages: The application winds through loan officers, their assistants, submittal personnel, processors, underwriters, compliance teams, and never ending review specialists to ensure all milestone docs were sent when they were supposed to be. Why? See below.
- Regulatory Navigation: Stringent regulations, like TRID, the Map Act, Mars Act, Safe Act, Dodd Frank, and so many more very lengthy federal government laws (all created with the best of intentions) after the 2008 housing collapse) cause road bumps, must be followed to the letter, and generally added a whole bunch of eyes on every transaction. This IS NOT a bad thing but it adds an incredible amount of time to remain compliant.
- Decision-making: A layered evaluation culminates in the final loan decision, which can sometimes be a lengthy wait, and may not be favorable.
- Prolonged Wait Times: The thoroughness means patience is more than just a virtue; it's a necessity.
- Restrictions on Property Numbers: Conventional lenders often limit the number of properties an individual can finance, potentially stifling expansive growth for prolific investors.
- Many deal killers: Whether is something not provided, something that suddenly becomes necessary when looking through a microscope, or something simply overlooked; if an investor doesn’t have it and can’t get it, or provided something an underwriter flags, the deal is probably dead. It is much tougher to get exceptions in conventional lending than it is in hard money.
The Hard Money Edge: Direct communication with actual funding decision-makers is an unspoken advantage. Since many hard money lenders service their loans, adaptability and negotiation become easier. This partnership means any shifts in strategy or unexpected challenges can be addressed head-on, with both parties pulling in the same direction.
Concluding Thoughts: Both Hard Money and Conventional Financing serve critical roles in the real estate investing world. Conventional lending can provide 100% or very near 100% financing for owner occupied homes where hard money owner occupied loans are incredibly rare. Hard money is a simpler, faster path to short term money with very little red tape. The decision to use any lender can include almost anything; it may hinge on objectives, financial portrait, speed, and portfolio size to name a few. With changing landscapes and evolving challenges, having a trusted partner can be the compass you need in the intricate maze of real estate finance.
