"Hard Money Lenders - Last Resort or Goldmine?"
Anyone who has heard of hard money lenders
knows they have a bad reputation. They are known for huge
upfront costs, expecting 30-40% upfront either in equity
or as a down payment and another 4 or more points paid up
front (a point is 1% of the loan value). The annual interest
rate is usually 12% or more, and the balloon payment is
usually due in only a year or two.
If all this isn't enough, there is the
fact that hard money loans are designed so that there is
little risk for the lender. Between the upfront costs and
the collateral, the lender can foreclose and still make
money. This is also why hard money loans are perfect for
real estate investors.
"What?" you may ask. "How are loans with
such horrible terms perfect for real estate investors?"
The answer is simple: less red tape. Hard money lenders
are willing to work with people who cannot verify their
income and people with bad credit. It is much faster to
get a hard money loan than a bank loan, and if you're investing
in real estate you often need the money now or risk losing
a deal.
Moreover, hard money lenders lend to real estate investors
based on the value of the house after it has been repaired
- so even though they are lending no more than 70% of the
property value, you can still get all you need to purchase
the house and make the necessary repairs. You can also put
up an additional property as collateral in order to ensure
you get the capital you need quickly. For real estate investors,
having to make a balloon payment within a year or two should
not be a problem, as they will have already sold the property
for a substantial profit by then.
Although hard money loans are ideal for real estate investors,
there is one potential problem that must be overcome: You
have to find a hard money lender. Hard money lenders can
be very difficult to find, as many of them work within a
limited geographical area, so that they are lending money
in an area they are familiar with and so that they can personally
view the property they are lending money for.
In order to find a hard money lender it's a good idea to
check with a mortgage broker, who may work with some hard
money lenders. You can also check the classified ads of
the local newspaper for offers of private loans. Finally,
the internet is becoming a useful resource for locating
hard money lenders who can help you with your next real
estate investment.
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