The #1 Reason to Obtain Hard Money First

The #1 Reason to Obtain Hard Money First

It goes without saying that a lot of the projects we fund make use of multiple forms of financing. For example, we have funded real estate investments with short-term bridge loans that have allowed our clients to obtain properties and then work out traditional financing. In cases where multiple funding options will be utilized, it’s best to obtain hard money first.

Obtaining hard money first is wise for many reasons. However, the number one reason rests in the fact that hard money lenders want to be in the first position in terms of liens. They really need to be in that position given that they assume more risk than other financial partners.

Hard Money Secured with Collateral

To better understand the first position issue, let us go back to the basics. Hard money is largely secured with collateral. Hard money lenders look at the value of the collateral being offered which, in many cases, is the property being acquired. Approval is offered on the understanding that the collateral is valuable enough to cover the loan in the event of default.

Basing approval on collateral makes things easier for both lender and borrower. But it also forces the hard money lender to take on risk that a bank would not. Subsequently, hard money lenders will almost never agree to taking second or third position. If they are going to loan, they want to be in the first position.

From a practical standpoint, being in first position reduces risk by guaranteeing the lender is paid first should the property be seized and sold. Each person or entity with a lien in place is in a particular position. Whoever is in the second position gets paid after the entity in the first position, and so on up the line. The later one’s position, the less likely one is to get paid in the event of default.

Being in the second or third position is a no-go for most hard money lenders. They will not even entertain lending from a secondary position. That is why it is so important to obtain hard money first if you are planning to utilize multiple funding sources.

Hard Money Is Fast Money

Despite the first position requirement, there are plenty of viable reasons to obtain hard money first. For instance, hard money is fast money. A typical hard money loan can be approved and funded in a few days. By comparison, it can take banks months to close and fund.

Incidentally, this is why so many clients turn to us when they are looking to obtain new investment properties. The speed at which we work allows them to be at the cutting edge of what is an incredibly competitive industry. They have the leg up on other investors who are not able to obtain funding as quickly. We have seen more than one case for which speed was the determining factor in who made the deal on a piece of property.

Bring Good Collateral to the Table

In closing this post, he cannot stress enough the need to bring good collateral to the table. Real estate is often its own collateral when hard money is being utilized to purchase it. However, we fund more than just property acquisitions. The point is that any type of hard money loan requires strong collateral to support it. Make sure yours is up to snuff.

Should you be planning a project that will require multiple funding streams, be sure to look at a hard money first. Remember that hard money lenders want to be in the first position among lien holders.