Private money lenders are often confronted by several different types of borrowers. While each one is unique, they are all looking for the same thing, funds. There are essentially five types of hard money borrowers.
The first and most common is that of the home flipper. He or she is typically looking to purchase a residential property and complete renovations on it with the intention of reselling it for a profit once the project is complete. Those in this category of borrower generally find private money attractive because conventional banks may not lend on properties in poor condition. In addition and more importantly, access to private money is more conducive to a timely and profitable flip as it does not take as much time to secure and is not locked up for years.
A similar type of investor is one that is looking to purchase a residential property, complete renovations and then rent the property for cash flow purposes. This type of borrower finds private money attractive for the same reasons as investors in the home flipper category.
There are also builders and developers who intend to purchase vacant land in order to permit and develop it into homes or for commercial use. These borrowers are interested in private money based primarily on the speed in which the funds can be available. Additionally, many banks tend not lend on speculative development.
Commercial investors generally seek to use private money as a bridge loan because a conventional bank will not lend on a commercial property that may be considered an un-stabilized asset.
Homeowners with bad or no credit also sometimes seek out hard money loans as a mark on one’s credit, even from many years past can prevent someone from obtaining a traditional loan until a certain amount of time has passed. However, hard money lenders will still lend to borrowers with credit issues in their pasts. This is especially true if they see that someone is trying to turn their life around after a bankruptcy, foreclosure, or short sale. Often these borrowers are able to refinance into a traditional mortgage after a year or so and pay off the loan due to an improved credit score.
If you are looking for a private money loan, be advised that they are going to cost more and are usually accompanied by more burdensome terms. However, the benefits generally outweigh the negatives as borrowing from a private money lender will result in a quicker loan. This is due to the fact that you do not have to navigate the same process that comes with traditional lending institutions. Moreover, private money lenders will take risks that most banks are not willing to and private money, for all intents and purposes, is a fundamental tool for the average investor.
That being said, keep in mind that these loans usually only last a year or two. Therefore, you must have an exit strategy in place before you enter into this business transaction.