The Pros and Cons of Hard Money to Fund Fix-and-Flip Projects

The Pros and Cons of Hard Money to Fund Fix-and-Flip Projects

The Pros and Cons of Hard Money to Fund Fix-and-Flip Projects

Comments Off on The Pros and Cons of Hard Money to Fund Fix-and-Flip Projects

Hard money does a lot of good things for the borrowers who utilize it. It is certainly not the right funding option for every need, but hard money tends to prove itself very valuable when it is a borrower’s best choice. Just know that any hard money loan comes with some risk.

Actium Partners, a hard money lending firm based in Salt Lake City, UT, prefers to focus its loans on commercial real estate acquisition. They have been known to loan for other things, like business expansion. They absolutely will not provide funding for fix-and-flip projects.

On the other hand, there are other hard money lenders who specialize in fix-and-flip. They don’t put their money into anything else. So why the difference in attitudes? That is best explained by discussing the pros and cons of hard money as fix-and-flip funding.

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1.   Pro: Speed

From the borrower’s standpoint, one of the biggest advantages of hard money is the speed at which it can be obtained. It can take banks several months to approve a loan. Your typical hard money lender can approve in just a few days. Even though Actium Partners doesn’t do fix-and-flip loans, they’ve been known to approve commercial real estate loans in under 24 hours.

2.   Pro: Volume

Fix-and-flip tends to represent high volume, which is a pro for hard money lenders. Fix-and-flip deals are of lower monetary value, but hard money lenders can fund more deals with the same amount of capital. The firm that does so makes its money on volume rather than the loan value.

3.   Pro: Asset-Based

A pro for both borrower and lender is that hard money is asset-based. The asset-based model allows borrowers to apply and get funded with as little hassle as possible. From the lender’s perspective, asset-based lending is clear-cut and fairly simple to facilitate. Through it all, assets provide collateral to minimize lender risks.

4.   Con: Higher Risk

Speaking of minimizing risks, hard money loans are riskier by their nature. Approval relies almost exclusively on assets, so lenders don’t take the time to understand a borrower’s credit history. That means risk. The higher the risk, the more borrowers pay for the privilege of borrowing.

5.   Con: Higher Rates and Shorter Terms

Lenders mitigate their risks through higher rates and shorter terms. Neither one is obviously good for borrowers. They pay considerably more interest compared to traditional bank borrowers. And as for the terms, forget 20 and 30 years. It is almost unheard of for a fix-and-flip loan to be extended beyond one year.

6.   Con: Less Leniency for Default

Another con for borrowers is a lack of leniency in the event of default. In other words, hard money lenders do not tend to waste time when borrowers don’t make their payments. The day after a payment is late, a notice goes out. That notice demands satisfaction within a very short window of time.

The lack of leniency is definitely a disadvantage for borrowers. But for lenders, it is an absolute necessity. They cannot afford to linger because they may ultimately have to repossess the borrower’s assets to cover the cost of the loan. But who is to say those assets won’t be considerably less valuable six months down the road? Lenders need to move fast in order to keep risk to a minimum.

Hard money can be used to fund a fix-and-flip real estate investment strategy. Plenty of lenders are more than happy to fund fix-and-flip. Plenty of others are not. Lenders and borrowers need to weigh the pros and cons and decide whether or not hard money is the right way to go.

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