Borrowing large sums of money for things like real estate investments and business expansion can be difficult when you are dealing with a bank. Things are a lot easier with hard money. Why? Because hard money lending is asset-based lending. The assets a borrower brings to the table make an enormous difference.
In an asset-based lending scenario, approval decisions are not made based on the full faith and credit concept. They are based exclusively on whatever asset a borrower offers as collateral. You could say that hard money is all about assets and not be far off.
Lenders Can Be Flexible
The first thing hard money borrowers should know about assets is that lenders are open to lots of options. Let us say you approach Salt Lake City’s Actium Partners looking for a loan to buy a group of multi-unit apartment buildings. You would offer the entire property as the asset that backs the loan.
That is generally how it works for real estate investors. The properties they are looking to obtain are also the assets they offer as collateral. But what about a business looking to expand? It might offer a portfolio of business equipment as an asset. The business owner might offer a separate piece of land independent from the company’s current location.
The fact is that lenders have unlimited flexibility in determining the assets they will accept as collateral. They can accept anything they believe minimizes risk and supports the amount of the loan request.
The First Position Issue
When real estate is offered as collateral, hard money lenders insist on being in the first position. What does this mean? It means there cannot be any liens on the property in question. It must be owned by the borrower free and clear.
Hard money lenders insist on the first position for their own protection. If they were in second or third position behind other banks, a default could leave them with no means to recover their money. It is first position or nothing at all.
The Trust Deed Arrangement
Although there are exceptions to the rule, buying property with a hard money loan often results in a trust deed arrangement rather than the hard money equivalent of a mortgage. Again, this is to protect the lender.
A trust deed arrangement transfers legal ownership of the asset to a third-party, like a title company for instance, until the loan is paid off. Should the borrower default, that third-party – also known as the trustee – can seize and dispose of the property in order to raise funds to repay the loan.
In principle, this would be no different than a bank repossessing property on a defaulted loan. The difference is one of process. In nearly every state, the process governing trust deed scenarios is much simpler and faster. Default can be addressed in a couple of months. On the other hand, foreclosing on a mortgage could take a year or longer.
LTVs Still Apply
Despite hard money lending being asset-based, loan-to-value (LTV) ratios still apply. In fact, hard money lenders tend to offer lower LTVs compared to banks. A 50% LTV is not out of the question in hard money, while banks are more likely to offer LTVs closer to 75% or 80%.
When it comes to hard money, assets play a vital role. They are the deciding factor when approval decisions are made. Lenders can accept all sorts of assets as collateral, though the most common asset is real estate. A valuable piece of real estate can do wonders for opening up hard money options.
