A common question about hard money is, does hard money work the same way as cash when buying a property? The short answer is no, but there is a more complete explanation.
Hard money loans are often used in situations where the purchase of a property has to close quickly. Sometimes, this is because the quick close was necessary to get the offer accepted over competing buyers. Other times, it is because the original loan fell through and the buyer had to scramble for a fast solution.
Regardless of the reason, many buyers and real estate agents think of hard money loans as the same as cash. After all, when was the last time a bank closed a loan in just a few days? (In case you were wondering, the answer is never.)
Hard money, also known as private money, is typically handled by a broker with individual investors providing the money for the loan. Because one investor can review an entire loan file in a short period of time, sometimes in as little as a few minutes, it is impossible for a bank to compete on speed.
Their processes are split between different people. They have one person to collect data and set up the file, another one to underwrite the file, another to review the appraisal and another to close the file. This is a simplified version and it usually has more people to handle other steps. The fact is that they aren’t set up to move quickly.
Speed alone can cause hard money to be considered the same as cash but it is still a loan and it requires someone other than the buyer to approve it and produce the money needed for the loan.
You have probably seen listings that said they would only accept cash offers. This is almost always because the seller thinks that the property won’t qualify for any kind of mortgage. In most cases, they are wrong because hard money is used for exactly that type of property.
When making an all cash offer, it is almost always required that you provide proof of funds. The seller and their real estate agent want to see that you have the cash to close. And if you are getting a hard money loan, the lender isn’t going to give you a copy of their bank statement to prove they have the cash you need.
The proper way to handle it would be to make the offer showing that you are using a hard money loan to buy the property. Hard money is still a loan and a pre-approval letter is needed to go along with your offer. It may need to say something about the condition of the property not being a problem. A properly worded pre-approval letter can make all the difference in the world in getting your offer accepted.
Another important key is that the loan officer who wrote the pre-approval letter has to be available to talk to the listing agent before the offer is accepted. This can be the final requirement before an offer will be accepted.
So even though hard money is similar to cash and can be almost as fast, it is not the same.