I know that marketing is supposed to attract interest and generate customers who will pay for services being offered. I also know that most marketing people seem to push the message that their product is for everyone.
The fact is that most products and services are designed to help a specific group of people. Hard money loans are one of these services. They are designed to help those who cannot get a bank loan, but that isn’t all.
Hard money is ideal when a borrower has bad credit, a problem property or cannot prove their income to the satisfaction of the banks. Before I tell you why it isn’t for everyone, I want to go over a few details on the things is is intended to handle.
Bad credit could mean a long history of late payments or a recent situation of late payments. It could be due to a bankruptcy that was too recent for the banks to work with or the same with a foreclosure or short sale. It could be a single missed payment on a mortgage.
In short, bad credit doesn’t only mean a low credit score. It just means the banks don’t like something about your credit. From the banks’ viewpoint, it could also be no credit or no credit score.
Similarly, there are many different definitions of a problem property. The most obvious one is where the property is in poor condition. Even this has various stages. To a bank, a house with a leaking roof would not be acceptable. They won’t even lend on a house that has broken windows or a water heater that doesn’t have the required double straps.
Of course a home that needs a complete remodel because it is in terrible condition would be a good candidate for hard money. The banks don’t like this type of property but hard money lenders can see the potential in it and, because they lend based on the current value or hold money to be used for the rehab, they know their loan is well secured.
And let’s not forget the “unusual property” that the banks hate. In this category, we have: the manufactured home that needs to be put on a permanent foundation, the geodesic dome (aka dome home), the property with both a regular home and a manufactured home and the home on too many acres. There are others too. If it isn’t a “regular” property, the banks don’t like it.
Finally, we come to the proof of income situation. This one can be very touchy. Self-employed borrowers who make good money may be able to write off enough on their taxes so it doesn’t look like they make enough to qualify for a loan even though they have no problem making payments.
Sometimes, a person has a project that will make a lot of money but until the project is done, they can’t prove they can afford to do it. Banks will run away from these projects but hard money can be an ideal solution.
So why is hard money not for everyone? The very short answer is that if the numbers don’t work, it isn’t a solution.
What I mean by this is that you have to run the numbers and make sure they are affordable and profitable. If they aren’t both of these things, it is not a solution.
Checking for affordability is not quite as simple as it may seem on the surface. The obvious way to check this is to figure out your income and expenses to see if the loan will fit within your budget. But what if it doesn’t while you know the project will result in a good profit?
This is where the creativity of hard money comes into the picture. There are ways of figuring out a solution to this so that you can make it to the end of the project and get the profit you are looking for. For example, having cash reserves to carry you until you get to the point of being able to sell or refinance the property can be very workable.
Moving on to the profitability of a project, there are also different ways of looking at it. The profit can be immediate, such as buying a rental property with a positive cash flow. Or you can see the future profit once a project is done or can be moved to a loan with a lower interest rate.
If a project is not affordable or profitable with a hard money loan, it should not be done with hard money. But before you reject a project or a loan as unworkable, it is smart to have a professional look it over with you to see if a solution can be created. You might be surprised.