The question was asked of me recently of why would real estate investors use hard money lenders? The correct answer is that there is more than one answer. I will give some reasons why they do. With that said, I must tell you that hard money loans are not for everyone. This article will be about why people DO use them.
The reasons are:
1. Speed-Even someone with great tax returns and high credit will use a hard money lender. Last week I did a San Diego hard money loan for someone who made $162,000 a year with good credit.
He didn’t have the 30 to 45 days it would have taken to get a conventional loan. A time deadline is especially crucial when you purchase a house which is a short sale. When the bank finally gives the OK after perhaps months of negotiating, they have a very short window in which they want their deal closed and off the books. These banks are not happy to say the least when you don’t honor their deadline and could in fact kill the deal.
2. Minimal paperwork- When getting calls for a California hard money loan, I am often times astonished at how many people do not file their taxes on time or in some cases not at all. A conventional mortgage person asks for copies of their previous 2 years tax returns and some people can’t produce one.
As a hard money lender, I don’t need to see someone’s taxes. The loan is based on the equity of the property. I realize in owner occupied hard money loans, they do want to see tax returns. (We do not do owner occ loans.)
3. Low Credit-Some people want it both ways. They want to not pay the people they don’t want to pay AND get 4% money. You cannot have that. I see credit scores lowered 100 points by someone getting into an argument with the trash collector or a medical billing. Many times these disputes are a couple of hundred dollars or less. Wouldn’t it be easier to pay these bills even though you think you are right and keep your credit high?
4. Foreign Nationals-How does a foreign national get a regular loan? It can be sometimes hard to get a California hard money loan so they turn to a local San Diego hard money lender or a Los Angeles hard money lender. The foreign national must wire their purchase money from a US bank. I don’t know about other hard money lenders but we won’t accept money from a foreign bank. It must be from US soil.
5. The Self Employed-It has been said that small businesses make up 80%of the employment in the US. (I know, everyone thinks people in California work for Google or some other high tech company.)
Some self employed also want things both way. They have so many write offs in their business that their adjusted gross income is so low that they couldn’t qualify for a shack in the desert. They also want the 4% money while minimizing their taxes. My advice is ease up on the write offs, pay Uncle Sam and get a better home mortgage rate than going to a California hard money lender.
There you have it. 5 reasons (there are more but that is for another article) to use a California hard money lender and get a hard money loan. When someone gets a San Diego hard money loan or a Los Angeles Hard money loan, there is a reason for it. As I said before they are not for everyone but many investors sure like the reasons I mentioned.
I forgot the leverage aspect. If California investors pay cash for a home, they might be only able to buy one. If they use California private money, they may be able to leverage their money into buying 3.