Hard money lending investing aimes to profit from asset-backed financing in real estate, where the loan is given against low loan to value (of the property) or LTV value to guarantee profitability.
In addition to low LTV value, another typical character of a hard money loan is that these types are often issued at much higher interest rates than conventional property loans and are almost never issued by a commercial bank.
In determining an LTV, “value” is often defined as “today’s purchase price”, which the lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold quickly.
The hard money value thus differs from a typical market value appraisal, which assumes a situation where buyer nor seller is acting under duress for a quick sale.
For the lender, there are several obvious risks.
For one, as an asset backed loan, the value of the house against which the loan is given is the biggest of those risks and a lender needs to have familiarity and certainty in getting the price estimated.
In a fast declining real estate market, a portfolio of hard money loans may fast lead to significant losses to the lender.
A lender also does typically not rely on bank loan rates as a guideline for her rates, but rather, the hard money rates are often more dependent on demand and supply for this specific loan type and on the market condition for the underlying asset, the properties against which the loan is given.
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