Let’s say a great investment opportunity pops up that you can turn around in just a few months, but you need to move fast to secure it. You don’t have the funds in your bank or your partnership, and, in any case, creditworthiness is a bit short for a traditional bank loan. Where can you get quick financing to seize this project?

Private investment groups known as “hard money lenders” make high-interest, short-term loans based on the asset, not the borrower, so creditworthiness is a minimal factor.These hard money lendersfill the gap created by the cumbersome lending processes of traditional banks which take time, paperwork, and have requirements that may be difficult for a fix-and-flip investor to meet.

What are the basics you need to know about hard money?

The pros of hard money lending:

• It’s fast. Typically, there are only a few days for approval and funding. Some lenders will even turn loans around in 24 hours or less.
• There are low requirements for creditworthiness because the lender focuses on the property backing the loan rather than the borrower.
• Much less paperwork and bureaucracy is required compared with traditional bank loans. The process is more straightforward than the traditional bank loan process.
• You can get short-term financing with more flexible terms. It’s possible to arrange low monthly payments with a balloon at the end of the term when your project should be closing out.
• Re-negotiation is more likely to be an option if the project goes longer than expected or other issues come up. Hard money lenders will often extend terms as long as they are earning interest.

The cons of hard money lending:

• They charge high interest rates at eight to ten points or even more above traditional 30-year loans make these loans desirable only for short-term needs.
• You get a lower loan-to-value ratios because hard money will usually finance only 50% – 70% of the property value. Traditional long-term bank loans will usually go up to 80% to 95% of the property value.
• The borrower has to have “skin in the game” since hard money lenders want to see that the borrower is contributing some of their own money.
• Substantial fees can add up with the points that are charged on closing, just as with traditional loans. Loan brokers who match the borrower and lender also charge points. With points of 1% to 4% of the loan value loaded on, total fees can be in the thousands.
• That balloon payment at the end can push a borrower out if the project doesn’t close out on time. While many hard money lenders are happy to renegotiate and allow more time in exchange for the interest, make sure that you know what this will cost you in additional fees. Check to find out the lenders policy on this prior to signing on the loan and make sure that it is in writing.

Hard money’s fast turnaround, streamlined paperwork and processes, and reliance more on the project than on the borrower’s credit makes projects possible. Hard money can be the bridge loan or opportunity capture for a quick acquisition and turnaround project. Particularly during times when traditional banks are tightening credit requirements, hard money lending opens doors to short-term projects you might otherwise miss.

Have you located the hard money lenders in your area?

You can create lasting, generational wealth in real estate – if you know how! Download my FREE ebook “How to Find Underpriced Properties: Secrets for Creating Wealth with Real Estate in ANY Economy” from Andy Werner at StreetWise Property Investing.