Hard Money Myth #4

Hard money lenders make risky loans.

The reality:

While the collective wisdom, even among real estate and mortgage professionals, is that hard money lenders make risky loans, our experience is that the opposite is true.  Because such lenders are typically lending their own money (as opposed to a bank employee lending someone else’s money) they are particularly risk averse.  Unless a hard money lender really understands how to value the collateral against which he is lending and the prevailing market, he will likely not make the loan, regardless of the strength of the borrower or the LTV.  Infrequently a hard money lender will consider history with a borrower because of the borrower’s consistent performance.

On the other hand, with understanding comes knowledge, and a hard money lender may make a loan that others consider risky because he simply has better information.   If a lender understands a market and has an exit strategy himself should he/she have to take back a property, the lender perceives less risk and might lend where others won’t.

This is why many hard money lenders are truly local, and don’t use conventional appraisals to make decisions on valuation.  They may use the appraisal as a source of information about the property, but they will value the property themselves based on their knowledge of the local market and the trends in a neighborhood.