In a recent article by Karen Freifeld for reuters.com, the Department of Financial Services is looking into 9 “hard money lenders,” to see whether they are intentionally creating hard money loans with terms that might be driving borrowers into default.
What are “hard money lenders?” I asked my friend and colleague, Assaf Ran, CEO of Manhattan Bridge Capital, Inc., to give us an explanation of this term. Below is his response:
When you sign a purchase agreement for a real estate property, you can sign what’s called a soft contract or a hard contract.
Soft Contract
Soft Contract refers to situations where you can exit the contract and your down payment or deposit is refundable.
There are contingencies:
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Mortgage contingency.
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If the closing occurs and the contract’s been closed, you will have to come up with the balance due.
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If the closing doesn’t occur, the contracts will not close.
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Due diligence contingency.
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Governmental conditions contingency.
For example: In that case of a mortgage contingency, the seller agrees to allow the buyer time to arrange for a mortgage. If the buyer does not manage to arrange a mortgage successfully, the contract will be canceled and the buyer will get the down payment back.
When there are contingencies on the contract, the contract will be referred to as a soft contract.
Hard Contract
Professional real estate developers in many cases agree to sign a hard contract, meaning that there are no contingencies whatsoever on the contract and therefore the deposit is not refundable, or exchange of a better price.
When they sign a hard contract, as the title clears, they have to close fast. That’s when they turn to a hard money lender because the banks are too slow for them at that point. They’re under a time constraint, so time is of the essence.
Hard Money Lenders
Hard Money Lenders are those who finance real estate transactions to professional real estate investors and developers, usually in exchange for first mortgage position on the property. Sometimes, in addition to that, they get developers’ personal guarantees. In some cases, there are hard money lenders that would accept a second mortgage position as their collateral.
The reason that most real estate investors are turning to hard money lenders, is that hard money lenders will advance the money faster than conventional banks.
When the real estate investor have signed the hard contracts, in many cases, if he doesn’t have the cash in the bank or some rich investors, he will turn to a hard money lender and will pay higher interest rates in exchange for a faster closing. Typical hard money interest rates are 12%-16%. Sometimes, hard money lenders also charge initiation fees.
There are two types of hard money lenders.
Conservative or Innocent:
This type is considered to be a real financing company. They would like to see the interest and principal paid on time, as agreed and move on to the next deal. This type will be ultra cautious to avoid a default or a problem with the transactions and/or the borrowers.
Manhattan Bridge Capital, Inc which is a publicly traded mortgage rate is definitely considered to be this type of hard lender.
Loan to Own
The “loan to own” lenders are looking for problems. Their intention is not always to get the interest and principal paid on time, but to set up the loan in order to foreclose on the loan and take over the property.
It is this last type of hard money lender that is giving a bad name to the industry and whom the Department of Financial Services is looking into.
Assaf Ran
CEO and Chairman of the Board
Manhattan Bridge Capital, Inc.
60 Cutter Mill Rd STE 205
Great Neck, NY 11021
Phone: 516-444-3400
Website: www.manhattanbridgecapital.com
Mendy Lipsker
Mendy Realty Inc.
822 Montgomery St
Brooklyn, NY 11213
Phone: 646.662.5454
email: info@mendyrealty.com
website: mendyrealty.com
