Understanding the “Secured” Nature of Hard Money Mortgage Lenders

Hard money investors all have one thing in common: they want to protect their capital! Mortgage companies that specialize in financing the acquisition of distressed properties understand this dynamic better than most, which is why “hard money” loans are considered “secured”. But, what makes them secured? Is it possible to generate healthy returns on capital without taking substantial risks? Like any investment, risk is involved. However, for hard money investors, the hedge against loss relies on the borrower’s plans for the property and a proper assessment of its value. Still confused? Let’s outline how hard money mortgage lenders protect their investors.

Collateral

Hard money loans are secured, meaning that the applicant agrees to use the acquired property as collateral for the loan agreement. In order to ensure capital returns, the hard money mortgage lenders use independent appraisers who take several components into account. From the property’s location to estimated market predictions, the lender will likely take a very conservative estimating approach. This protects the investors, while still providing the buyer with enough capital to acquire the distressed property.

We do not live in a perfect investment world, however, and at times, the property must be repossessed. When this occurs, the investors, who have all been listed on the deed as “financiers”, now own their percentage stake of the location. The lending firm will then move to unload the property, returning the capital investment (plus a share of any gains) to the investor.

The Importance of Accuracy

Prudence is key when it pertains to real estate. Nobody wins when lenders take a “best case scenario” approach to evaluating a property. Because hard money lenders understand that capital protection is the priority, they remain quite conservative when it comes to lending approvals.

Once the appraisals have been completed and submitted, the team will immediately begin assessing the expectations for the property and the surrounding area. This protection adds a layer of security that most other investment opportunities cannot boast.

Well-Qualified Teams

When attempting to assess an investment firm’s quality, it is often a good idea to assess the expertise of the team. No one expects investors to simply hand over hard-earned capital, which is why one shouldn’t be afraid to learn more about the key players. Ask questions about the appraisal process, specifically, as this is the most important aspect of the transaction. In doing so, one can be sure that they are placing their money in competent hands.

Securing loans is the primary focus of hard money mortgage lenders. This important aspect of the transaction should not be undersold. For hard money investors, the returns can be lucrative, provided that they are working with a skilled and experienced team. Because the properties are often collateral for loans that are below their appraised value, the investors can be sure that their capital is protected and the firm handling the transaction will quickly recoup losses. Remember, there are no “sure things” in investing, but when it comes to hard money investors, the return far exceeds the involved risk!