The most common question we get from borrowers, brokers and investors is "why do people borrow hard money?"

We have analyzed all of the data from over 20 years experience in hard money lending and have determined that there are 4 primary reasons that people use private money or hard money financing. They are timing, situation, property type, and borrower. Institutional lenders disqualify loan request for one or more of these four reasons, causing the borrower to resort to a hard money or private money loan.

Timing

Timing is the number one reason why people borrow hard money. Institutional lenders take 30 to 60 days to process, underwrite and close a loan request. On commercial loans the process can take up to 6 or 8 months. Borrowers who have emergency cash needs for opportunities that arise are generally willing to pay a higher rate and fee for hard money, as the opportunity they have will easily offset the cost of a hard money loan. Often times we see purchase money financing fall out at the 11th hour and the buyer must perform or risk losing their earnest money deposit.

Situation

Often times we have well qualified people caught up in a situation that prohibits them from acquiring institutional financing. We often see borrowers who have been or are going through a divorce, in this situation, one spouse would like to keep the property and the other spouse would like to get cashed out and move on. The spouse remaining in the property often times will not qualify for cash out refinancing to pay off the former spouse. Another example would be that institutional lenders and subprime lenders have exited the lending arena. In 2008 many institutional and subprime lenders went out of business as a result of the collapse of the real estate market. In 2009 and going forward for a period of time, institutional lenders will be very restrictive in their lending practices and subprime lenders have all vanished. As a result many borrowers who would have qualified for an institutional or subprime loan now fall into the hard money lending arena. These types of situations are common examples of when a hard money loan can provide a solution.

Property Type

Generally, institutional lenders loan on owner occupied residential and large commercial real estate. When the property type does not meet institutional guidelines, owners must look for alternative lending solutions. Institutional lenders will not allow a borrower to finance "cash out" of a non-owner occupied residence. Owners of non owner rental properties looking to access their equity will often times borrow hard money. Additionally, mixed use properties rarely qualify for institutional lending programs. We often see mixed use properties where the property consist of two retail store fronts with 5 residential apartment units in the rear of the property. This type of property will not qualify for institutional financing. As a result owners of mixed use properties often times have only hard money lenders to provide for their financing needs.

Borrower
It is a misconception that hard money loans are made only to borrowers with poor credit and no verifiable income. There are many occasions where a borrower will not fit into institutional lending guidelines and poor credit is just one of them. There are citizenship issues that come into play as well as corporate entities, partnerships and trusts. Each of these borrowing entities creates challenges for institutional lenders. Additionally, employment issues arise. Some borrowers may be self employed, newly employed, have gaps in employment history or have a recent career change. Each of these borrower issues would cause an institutional lender to reject the borrower’s loan application.

As you can see, there are many borrowers who do not fit institutional lending guidelines. These borrowers generally have equity that they would like to access and a hard money loan is an excellent way to access that equity without having to sell the property.

James Perry is President of Alliance Portfolio Private Equity Finance. For over a decade, Alliance Portfolio has been Southern California's direct hard money lending authority, specializing in custom coastal loans for residential, commercial and mixed use properties. He can be reached at jperry@allianceportfolio.com. For more information, go to www.allianceportfolio.com.