Hard Money Loans

What is a Hard Money Loan?

What are the risks as an investor who is thinking of giving monies to individuals who invest in these Risky Loans? Are there any protections afforded to investors? This article will attempt to reveal the pitfalls of such an investment.

Let’s first define what a Hard Money Loan actually is:

Hard money loans are High Risk Loans that are used in turnaround situations, short-term financing, and by borrowers with poor credit but substantial equity in their property that wish to stave off foreclosure. Hard Money Loans carry interest rates even higher than traditional subprime loans.

Since traditional lenders, such as banks, do not make hard money loans, hard loan lenders are sometimes private individuals that see value in this type of potentially risky venture.

These Individuals typically offer investors a “guarantee” of an annual return of at least 10% in return for an investment of at least $10,000.  How could they afford to make such a Return on Equity to an investor when a typical Certificate of Deposit (CD) from a bank typically returns 1%/year currently?

The answer lies in the premise of where the monies are intended to be invested for such a higher Return on Equity. The Individual, in question, takes the investment of $10,000 and says that the monies will be loaned to another investor in Real Estate to buy properties or with the intent to “fix” a property and resell the property at a higher selling price.  Why would the recipient of the Hard Money Loan be will to pay a higher rate of Interest? (typically15-25%) Than from a typical Bank that lends money to the Real Estate Market?

The answer lies in the stricter Credit Lending Standards that banks set on borrowers of the loans. Under a traditional Bank loan, a borrower pledges that he/she will repay the bank loan after verification of borrower’s income, assets, or credit score and ability to repay.

Hard money lenders are lending companies offering a specialized type of real-estate backed loan. They lend short-term capital (also called bridge loans) that provide funding based on the value of the real estate acting as collateral. Hard money lenders tend to focus on the value of the collateral property.

The Bottom Line: You have to look at the real reason as to why you’re promised a higher rate of return versus other investments. The reason is that your investment will be used in a HIGHER RISK investment to individuals who often times have low credit scores, who don’t have the higher incomes to repay the loans and are used for Higher Risk Real Estate investments than the Norm.

There are numerous cases of Fraud throughout California available for investors to see My Point.

Dan Winn is a Registered Representative offering securities through IFS Securities, Member FINRA/MSRB/SIPC. Home Office: 3414 Peachtree Road NE, Suite 1020, Atlanta, GA 30326.  The article herein is for informational purposes only and is not an offer to buy or the solicitation of an offer to sell any securities by the broker or the broker dealer. 

By Dan Winn