Frequently Asked Questions
‘Hard Money Lending’ is a broad term that originally derives from the “hard” loan costs involved: Specifically, the higher interest rate and/or loan origination fees charged by the lender compared to a typical bank loan.
Hard money loans may also be referred to, and further defined by, terms like: (A) private money loans; (B) short term loans; (C) bridge loans; (D) transitional loans; (E) asset-based loans; (F) rescue loans.
Many of the above terms may apply in a given hard money loan. For example, a developer (borrower) might take out a short-term hard money loan as bridge financing, using that as a transitional loan until a project phase is completed, after which he or she secures bank financing. The developer then using the proceeds of the new loan to pay off the hard money loan.
Such loans are also usually “asset-based.” (i.e. the value of the asset –in this case the land and/or improvements– is the collateral basis for the loan.)
The three most common elements in today’s hard money lending arena are (1) the loan has “hard” costs involved; (2) the loan is short term in nature (i.e. typically 6 months to 2 years); (3) the loan is asset-based in nature.
Typically, the “asset” in an asset-based loan is real property secured by a trust deed. Thus, another term frequently used to describe this type of hard money lending –from the lender (investor) perspective– is ‘Trust Deed Investing.’
Put simply, a ‘Hard Money Lender’ is any investor who makes a hard money loan. In the specific case of hard money lending known as ‘Trust Deed Investing,’ those loans are secured by liens on real property. The investor(s) are purchasing a whole or partial interest in a promissory note that is secured by a lien on the borrower’s real property.
Hard money lenders may vary in their focus by market type, project type, loan size, investment criteria, etc., but have several attributes in common:
- Hard money lenders charge higher rates than banks
- Hard money lenders specialize in making loans that some banks would not make based on their usual lending criteria
- In most cases, hard money lenders fund more quickly than banks and/or require less documentation than banks.
- Hard money lenders are regulated by a specific set of statutes relative to other mortgage lenders. In Nevada, we are governed by chapter 645B of Nevada Revised Statutes (NRS).
Often an individual hard money lender is a participant in a ‘Multi-Beneficiary Loan.’ Anytime there is more than one lender who is a “beneficiary” named in the trust deed document, the loan is considered a multi-beneficiary loan.
As a simplified example of a multi-beneficiary loan, consider a $1,000,000 loan with ten lenders (investors), each lending (investing) $100,000. Each lender (investor) is then a ten percent “beneficial owner” in the trust deed.
Such loans may also be originated by a mortgage broker who may, or may not, be an investor on the loan. The brokerage company is also then referred to as a ‘Hard Money Lender.’ Battle Born Capital is an example of such a hard money lender.
Hard money lenders differ from bank lenders in that they often fund more quickly, with fewer requirements and, generally, for shorter terms than banks. As previously stated, hard money lenders are sometimes called asset-based lenders because they focus much more heavily on the collateral for the loan, whereas banks require both strong collateral and –usually– excellent credit and cash flow from the borrower.
The asset in asset-based lending is, in most cases, a piece of real property which is being improved, developed, refurbished or built. Sometimes the real property is a piece of land which is being purchased for pure speculative purposes and is then “flipped” at a higher price to pay off the loan.
As a developer moves from phase to phase, the asset is increasing in value with the application of the funds borrowed. For example, the owner of a parcel of land may be developing it to build a number of homes. As he or she completes the various steps from taking “raw dirt” to graded/parceled lots with water, sewer electric, etc., the capital requirements of those phases can be financed using the underlying asset to collateralize the loan.
In hard money lending, each phase will likely be financed by a new loan. This keeps the loan term relatively short compared to many bank loans. The majority of hard money loans have terms of six months to two years.
Hard money lenders are willing to foreclose on and “take back” the underlying property if necessary, to satisfy the loan. Yet, a good hard money lender will work through numerous options to “work-out” the loan before moving to foreclosure.
Bank lenders look at the collateral, guarantors, and borrower ability to pay back the underlying loan from the borrower’s income, whereas hard money lenders are comfortable looking to a sale or third-party refinance of the property as the method of repayment.
Hard money lenders exist because many real estate developers/borrowers need a quick response and quick funding to secure a deal when looking for a real estate loan. Banks and other institutional lenders that offer lower interest rates don’t provide the same speed in their decision-making process, assuring quick access to capital. Additionally, as discussed, the “asset-based” nature of the loan decision provides for a very focused lending criteria.
Hard money loans can have a number of advantages over traditional bank financing including:
- A simpler application process and quicker approval/disapproval decision;
- Less emphasis of the borrower’s personal financial situation, including income and historical tax returns, compared to bank loans;
- More emphasis on the quality of the underlying asset as collateral and the plan for improvement or sale of that asset;
- Borrowers can allocate less time to seeking financing and instead concentrate on other business;
- Borrowers can avoid the delays (and often likelihood) of being rejected by a bank.
Disadvantages of seeking a hard money loan may include:
- Hard money loans are more expensive than bank loans, with higher interest rates and origination fees;
- The quality of hard money lenders varies substantially from one lender to another; some are unscrupulous and may be seeking to have the borrower default in order to foreclose on underlying real estate as a business strategy;
- Some lenders may collect non-refundable deposits without having the capital required to make the loan; they may either hope to find the capital once the loan is “tied up” or in rare cases, they may simply aim to collect the deposit with no intention of funding the loan.
To answer the question a brief recap of the Mortgage Lending Crisis is needed:
- In the decade leading up to 2007 the residential mortgage lending industry had seen meteoric growth based, initially, on the United States Federal government “priming the pump” for massive acceleration of home ownership in 1996.
- GSE’s (Government Sponsored Entities) such as Fannie Mae and Freddie Mac greatly relaxed underwriting guidelines and standards for conventional mortgages.
- Banks and other Mortgage Loan Originators (MLOs) created numerous loan offerings which had little to no qualifying standards for borrowers. (e.g. Alt-A and subprime loans)
- Wall Street and investors paid higher incentives for subprime loans creating a ready market for essentially “junk” loans.
- The “junk” loans were further leveraged by being placed into securitized instruments (bonds known as Collateralized Debt Obligations – CDOs) which were then traded on major exchanges with a spiraling number of “arbitrage” bets on the securities.
- Unethical Mortgage Loan Originators took advantage of the relaxed standards, knowing that they could quickly move the “junk” loans.
- The credit rating agencies aided and abetted the fraud by continuing to provide inflated ratings on the “junk” mortgage-backed securities.
- Wall Street continued to inflate the balloon even while knowing (as early as 2005) that the loan portfolios were built on a fiction.
- Global Credit Markets teetered on the brink of massive insolvency as the underlying asset value of over $1.1 Trillion in investments became suspect. Major financial institution such as Fannie Mae, Freddie Mac and AIG experienced severe financial problems.
- The “liquidity” evaporated as the market for the troubled assets came to a standstill.
- Lehman Brothers went bankrupt and both Goldman Sachs and Morgan Stanley changed their charters to become commercial banks in an attempt to stabilize their situations.
- The collapse of Lehman Brothers and near-collapse of other “Too-Big-To-Fail” Banks ultimately lead to the government intervention and bailout known as TARP (Troubled Asset Relief Program).
The impact on all types of lending in the United States –and indeed globally– was catastrophic. Yet while TARP provided a safety net for the banks, the “trickle down” impact to distressed homeowners took years to implement. In too many cases, legitimate homeowners found themselves badly under water on their homes or facing foreclosure.
Additionally, the more marginal and speculative (and in some cases fraudulent) mortgages were foreclosed upon or led to “short sells” across America from 2008 to 2015. Asset values of homes were impacted across the board as the market for home ownership hit the reset button.
Hard money lenders were even more severely impacted during the crisis. There were no TARP funds or bailouts in the non-bank financial sector. More than the impact on home prices, the asset values and liquidity of land and commercial developments was decimated. Most assets backed by Trust Deed lending were worth less than 30 cents on the dollar after the crash, if buyers could be found at all. Few of the hard money lending businesses in Las Vegas in the mid 2000’s are in existence today.
The recovery from the meltdown occurred slowly in most communities, more quickly in some. In some of the more depressed communities, a full recovery may never happen. As of the end of 2017, on a national basis, only 35% of homes have reached, or exceeded, their pre-recession values. Whereas, in markets like Denver, close to 99% of homes have done so.
In Southern Nevada, the recovery has been slower to take hold largely due to the impressive growth which we experienced for over 20 years prior to 2007. The Las Vegas metropolitan area was consistently in the top 3 markets in the United States for population growth and housing growth during those years. The steep rise precipitated an even steeper fall.
Average home values in the Las Vegas Valley today are approximately 72% of values pre-recession, while only slightly over 2% of homes have reached their pre-recession peaks.
The flip side for Las Vegas has been a steady rise in home and land values in the last 3-4 years. New project growth and establishment of the city’s first two Professional Sports franchises have added to an impressive array of new construction projects. Unlike many of the hardest-hit metro areas during the Great Recession, Las Vegas has experienced cumulative job growth of over 19% in the last 10 years, with population growth approaching 12% cumulatively.
Many economists and real estate prognosticators see this trend continuing as Las Vegas is expected to grow by nearly 50,000 people a year on average between now and 2025. (Growing from just under 2.2 million people to over 2.5 million in that time period.)
What does all of this mean for hard money lending in Las Vegas?
It provides a great opportunity as well as a cautionary tale. The need for financing from hard money lenders is large and growing in Las Vegas but the overhang still lingers from the past. Such lenders provided crucial “bridge” financing or “seed corn” for getting developments started for many decades. And will do so again with some important changes in the lending landscape.
Okay, so what exactly has changed since the last time?
From a regulatory perspective, there have been several changes in law to address some of the problems of the past:
- NRS 645B, the Nevada Revised Statute(s) dealing with hard money lenders has been amended to include new language both with regards to investor rights and to mitigate problems from the past.
- NRS 645B provides that if a private investor is placed into a business trust pursuant to a vote of a Majority of investors in the specific Loan, the beneficial interest of any private investor who does not consent to the placement, including, without limitation, any interest of a tenant in common who does not consent to the placement, must be placed in the business trust.
- Additionally, NRS 645B provides that the investors who consent to any action pursuant to a vote of a Majority of Investors in the specific Loan shall designate a representative to sign any necessary documents on behalf of the investors who do not consent to the action, and if the representative maintains written evidence of the consent of a Majority of Investors in that specific Loan, the representative is not liable for any action taken on behalf of the business trust or other entity pursuant to the NRS.
From a practical perspective, hard money lenders must work to provide the highest transparency to their investors to ensure the best possible outcomes with regards to loan performance and capital preservation.
Accordingly, we have built Battle Born Capital in such a way to best implement these changes and have made other improvements as well, including:
- Per Battle Born Capital’s Loan Servicing Agreement (LSA): If a Majority of investors in a specific Loan vote to foreclose on the real property securing the Loan, their vote will also allow Battle Born to place them into a business trust before foreclosure of the real property. Battle Born will provide a copy of the proposed business trust to each investor before they vote to foreclose.
- We have incorporated the best tools in web technology to provide investors secure 24×7 real-time access to all investor and loan documents and account statements.