Run a quick Google search on hard money loans and you will find tons of articles and blog posts to choose from. Many of them are rife with information, offering up commonly repeated myths as fact. One of the most prominent myths is that hard money borrowers are desperate. It is not true.
In any lending scenario, there are borrowers hard up for money. You can find them in traditional lending scenarios just as much as with hard money. Desperate borrowers are no more a product of hard money lending than non-desperate borrowers are a product of traditional lending. Desperation, or the lack thereof, knows no boundaries in the lending game.
So how did the desperation myth get started? No one can say for sure, but Salt Lake City’s Actium Partners suggests that it might have been an assumption that just took on a life of its own.
Lending Based on Assets
The main characteristic that sets hard money lending apart is its nature as asset-based lending. In other words, loans are made based on the value of the borrower’s assets rather than creditworthiness determined by looking at income, credit reports, etc.
Being asset-based allows lenders to take on greater risk by writing loans for borrowers who would otherwise be rejected by banks. This truth may lead to the assumption that hard money attracts desperate borrowers who have tried every other funding option and failed. But again, the assumption is not true.
Lenders Want Quality Assets
Hard money lenders like Actium Partners do not risk their own financial health, or the health of their principals for that matter, by making questionable loans. So right off the bat, they insist that borrowers have quality assets they can offer as collateral.
What is a quality asset? It is one that possesses two distinct qualities:
- Its value is greater than the amount being borrowed; and
- It can easily be disposed of in the event that doing so becomes necessary.
The truth of the matter is that hard money lenders don’t want to be landlords. They do not lend because they are looking to acquire property of their own. A hard money lender’s business model is one of sound investing, making money by earning interest on the loans they write.
Why Borrowers Are Desperate
Your typical hard money lender may encounter a desperate borrower from time to time. So perhaps it would help to understand why borrowers are desperate to begin with.
A borrower might need money to expand his business. He has been to every bank in town looking for a small business loan. Unfortunately, his history as a business owner and borrower isn’t that great. He cannot get a bank loan, which is a problem made worse by the fact that he’s already committed his company to expansion. He needs to find the money somewhere or risk going under.
In all likelihood, this borrower doesn’t have the assets necessary to satisfy a hard money lender. He is already overextended. Furthermore, he has put himself in a position of not having a viable exit plan. Both things combined make him too risky even for hard money lenders.
Quality Borrowers with Unique Needs
The vast majority of people looking for hard money loans are not desperate borrowers. Rather they are quality borrowers with unique needs. Hard money lenders are happy to meet those needs because they can do so while simultaneously earning good returns and minimizing financial risk.
The idea that hard money borrowers are desperate is a myth. Do not believe everything you read online about hard money. Much of it is just misinformation.
Comments are closed.