I would like to start with the main idea behind hard money bridge loans, which is quite straightforward.
A bridge is something, which connects two different corners and in this way helps you to overcome any difficulty in an easy and timely manner. For example, if there is huge river between two roads, then a bridge could help you in crossing that river within a short span of time.
Similarly, private or hard money also helps the investor to go from one corner to another, with the help of hard money loans.
So, the basic purpose of a bridge is to help you cross the distance as fast as possible i.e. it is short term and the people who uses that bridge already know their destination and that’s why, they can decide what should be their exit strategy.
The same holds true for private money or hard money as this is a kind of financing, which is for a short period of time and where the borrower knows their exit strategy. So, hard money financing is basically working as a bridge between you and your destination i.e. the property.
The ideal situation to understand this scenario is that you have a property in hand, which is quite good but it is in a foreclosure situation and the home-owner needs cash straightaway.
On the other hand, you are a home buyer, who is always looking for a good deal and you are willing to buy that piece of real estate but you need financing.
This is the place where hard money bridge loans can come to rescue you and the home owner. You can apply for loan and can buy that property.
Now, you can apply for loan via traditional lenders as well but it will take 2-3 months to give you a loan and they will ask you to fill several documentation. Within that period of time, there is a chance that you will lose that deal because if the home-owner is looking for quick cash, then he would not like to wait for 60-90 days.
In that scenario, there couldn’t be a better option than going for hard money bridge loans because it’s a short term loan and can be funded to you within few days.
You just need to make sure what’s your exit strategy is and when you would be able to return that loan. Another important aspect to get private money or hard money is to have a good equity position, which means that your loan application is based upon good collateral.
If you will compare bridge loans with the traditional lending, you will know the difference.
One of our clients told me his story of getting financing from a bank. Although, he had money in his bank account but he wanted to keep it as a flush fund.
So, he went to the bank and applied for financing on a property. But they wanted to know each and everything about him. His job, his credit history, his tax history and they asked him to provide documentation for all these things.
Eventually, the bank took months to give him financing and he was thinking that whether it was even worth going to the bank or not.
We need to understand that in this era of credit crunch, banks are also in a very difficult situation. They can’t lend you money easily because they have to follow strict rules and regulations.
On the other hand, private money lenders are held privately and they don’t follow any particular guidelines, so they can lend you money according to their own terms and conditions.
So, what he decided is that whenever he needs some quick cash, he will never go to the banks or conventional lenders because their processes are quite laborious and if he will wait for them to give him financing, then he will lose the property as good deals aren’t there for long.
That is why, a borrower would prefer to have bridge financing because they are really easy. They don’t care whether you have a poor credit history or you have recently lost your job.
If you want to get hard money bridge loans, then the only requirement is to have good equity. That’s it. The lenders will send independent evaluators to draw comparables and based upon those reports, bridge lenders will fund you a loan, which would be a short term loan for 6 months max.
Being an investor, one should understand that private money or hard money is equity driven and they are lending based upon the asset i.e. the property and nothing else.