It is somewhat amusing to read all the explanations of hard money found online. A lot of people attempt to explain hard money but fail miserably in the process. But truth be told, there isn’t really anything hard about hard money – with the possible exception of the collateral used to secure hard money loans.
Speculation abounds as to how hard money got its name. But allow the dust to settle and it becomes clear that hard money is so named because it is based on hard assets. Another way to phrase it is to say that hard money lending is asset-based lending. If you understand what that means, you have a firm foundation on which to build additional knowledge about hard money lending.
Assets vs. Borrower Credit Worthiness
Asset-based lending is lending for which approval decisions are based primarily on the value of assets being offered as collateral. Consider Actium Partners out of Salt Lake City, UT. Actium is a hard money lender that specializes in real estate investments. When an investor approaches them for a loan, Actium wants to know everything about the property being acquired.
Actium will appraise the property to determine its value. The value needs to be at least equal to the amount of money being borrowed. Ideally, it would be worth significantly more. If the value is there, Actium is likely to approve the loan.
In contrast, traditional lenders base approval decisions on what is known as ‘credit worthiness’. They look into the borrower’s credit history and score. They look into his income, assets, debts, etc. The goal is to determine the borrower’s credit worthiness based on current financial position, past history, and future ability to pay.
Hard Assets Provide Hard Security
Traditional lenders have their reasons for doing things the way they do. Furthermore, there is nothing wrong with the credit worthiness lending model. That model works fine for banks and credit unions. So be it. In the hard money game though, it is all about assets.
Hard money lenders fail and succeed based on asset value. It boils down to a simple principle: hard assets equal hard security. Let us look at a commercial real estate transaction for purposes of illustration.
Imagine an investor looking to acquire a multi-unit apartment complex. The property itself has real value. Any hard money lender could appraise the property and then compare it to similar properties in the area in order to determine its current market value. That market value represents a certain amount of money the property could be sold for if necessary.
The Best Kind of Security
Taking things a step further, a targeted property is the best kind of security on a hard money loan because it can be quickly liquidated should the need arise. Let’s just say the borrower defaults on his loan. His lender gives him 30 days to bring the loan current, after which it will seize the property and sell it.
The nature of hard money lending makes sale and seizure a lot easier compared to residential mortgage foreclosure. Hard money lenders can move quickly to liquidate a property in just a couple of months. That being the case, a high-value asset becomes the strongest security for backing a hard money loan.
Hard money loans are not difficult to understand once you know the details. There is really nothing hard about hard money lending except the assets offered as collateral. Hard assets equal hard security, which is why lenders are willing to make risky loans that traditional lenders will not touch. It is all about asset value.
