What about Hard Money Lenders?

We call them hard-money lenders. Others call them loan sharks. To us, "loan shark" is too harsh a term, because hard-money Senders play an important role in real estate. They fill a financial void where traditional lenders fear to tread.

Hard-money lenders loan money based on the "hard asset" that is used as security. The primary difference between hard-money lenders and traditional lenders is that the former will loan you up to 100 percent of the appraised value of the property. Sometimes, a hard-money lender will even loan you more than 100 percent of the value, if you have developed a good relationship with the lender or if you've completed some improvements to the property since the appraisal that the lender feels has enhanced its value.

For example, consider a run-down property that an investor buys at a discount price. The investor gets a first mortgage on the property from a conventional lender. The balance of the cash that she needs to close and fix the property is advanced by the hard-money lender. Once the property is rehabbed, a new appraisal is performed, and the hard-money lender may loan additional money against the new equity.
The other difference between hard-money lenders and banks is that hard-money lenders charge a much higher interest rate. This is how they earn their unsavory (and we think undeserved) reputation as loan sharks. The truth is, while there may be a bad element in the hard-money lending industry, you simply find out who those people are and stay away from them. You learn to deal only with those lenders who are recommended by other people you know in the industry, and you set about building a good working relationship with them.

It's true that hard-money lenders play an extremely valuable role. They fill a financing void: between traditional lenders and those people who have great potential to build wealth in real estate, but don't have all the money they need to take advantage of the opportunities they find.

To find hard-money lenders in your area, we again suggest that you attend a local real estate investment group meeting. Other alternatives are to run an ad in the newspaper or to call some of the advertisers in the "money to lend" section. When you find a potential source, check it out, and check it out thoroughly, if you are in a small town, for example, check your source's reputation in the large metropolitan area that is closest to you. He may have a track record there (good or bad) that you should know about.

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