Private, asset-backed lending – also known as hard money – operates outside the rigid framework banks and credit unions are constrained by. As a result, there is a misconception that hard money loans are designed as a safety net for borrowers turned away by their banks. Reality tells a very different story.
Hard money loans in Utah are certainly more accessible and flexible than conventional bank financing. But lenders are not sitting around with open checkbooks. Actium Lending, a well-known hard money lender in Salt Lake City, doesn’t lend to just anyone who comes knocking on the door. They are not alone. All hard money lenders are careful about whom they lend to.
The best way to understand the lender’s perspective is to think of firms like Actium as risk managers rather than charitable organizations. Lenders are investors. They lend with the goal of making money. Like other types of investors, they manage their risk appropriately. And sometimes that means turning away potential borrowers.
Who Typically Applies for Hard Money?
From the Wasatch Front to the Jordan Valley, hard money borrowers are not families looking to buy their first houses. The typical hard money loan in Utah is utilized by a sophisticated real estate investor, land developer, or corporate entity.
Real estate investors turn to hard money for quick acquisitions. Land developers include hard money in complex financing strategies that facilitate everything from acquisition to improvement to construction. Meanwhile, corporate entities turn to hard money to facilitate expansion, growth, and sometimes mergers and acquisitions.
Actium says the majority of its clients are real estate investors looking to purchase warehouses, retail spaces, and the like. Some already have a presence in competitive markets like Salt Lake City and Provo. Others are just getting started in Utah, looking at properties in West Valley City or in any of the state’s major ski resort areas.
Do Lenders Have Strict Criteria?
The idea that hard money is a safety net gives rise to the myth that hard money lenders will write checks to anyone who asks. Again, that is not the case. Lenders tend to operate with strict criteria designed to protect their interests. Every hard money lender is a private lender free to manage risk as needed. But typically, lender criteria are based on the following three things:
- Down Payments – Lenders rarely fund at 100%. In fact, they tend to operate with loan-to-value (LTV) ratios of 50%-70%. They require borrowers to put significant skin in the game.
- Property Value – The property being acquired must have clear, intrinsic value. It has to offer enough value to cover the amount being requested.
- Exit Strategy – An exit strategy is the borrower’s plan for paying off the loan at maturity. This tends to be the most significant hurdle because hard money lenders need to be reasonably assured they are going to be repaid. They will not approve if they do not have confidence.
With all three criteria satisfied, a typical hard money lender in Salt Lake City or Provo will give the okay. So the last question is why borrowers would turn to hard money instead of going to banks. Again, there are three reasons:
- Hard money lenders can get from application to closing in a matter of days.
- Hard money lenders don’t require a ton of supporting documentation.
- Hard money can act as a bridge loan between assets.
While you may have heard that just about anyone can get a hard money loan in Utah, it is not true. Lenders are very choosy about their clients. They have to be, because hard money lending is risky.