Because most people, even real estate professionals, know little about hard money lending, misconceptions about the business are prevalent.
Hard Money Myth #1
Fact: Most hard money borrowers are solid, successful individuals or businesses that are in a situation, or are presented with an opportunity, that does not fit easily into the rigid structure of institutional lending. They choose the hard money route because the lenders in this sector can move quickly and are flexible in structuring transactions. A hard money lender looks primarily to the collateral as the ultimate source of repayment rather than to the borrower's capacity, as indicated by their income relative to their expenses, or willingness of the borrower to repay the loan as reflected in their credit record. Self-employed individuals, businesses without a lengthy track record and borrowers without a flawless credit history are having a difficult time borrowing from institutional lenders today. Private lenders can often help in such circumstances.
Hard Money Myth #2
Fact: Most hard money lenders are successful businessmen with backgrounds in law, accounting, banking, real estate development or real estate investment. They provide a needed service, especially in today's economic environment. Most are lending their own money and/or money entrusted to them by friends, relatives or close business associates. It is an investment. Making loans is their business, and a bad reputation is counter productive to that effort. Referrals are the life blood of the business as most private lenders are small organizations with a limited marketing budget. That is not to say there are not unscrupulous people in the business, as in any business. However, their numbers are small and dwindling as a result of technology. A quick Google search will often expose the bad actors.
Hard Money Myth #3
Hard money is too expensive.
Fact: Hard money is likely going to cost more than that advertised by traditional lenders, i.e. banks. Private money is priced according to the law of supply and demand, just like that from more-traditional institutional lenders. Bank financing may not be an option. A quick funding date may be impossible for a bank to meet. A rental property may have just recently been leased and is not adequately seasoned. The borrower may be self-employed and have difficulty documenting his income. A borrower needs to explore all avenues and select the option that best fits his requirement. The cost of money is only one factor.
If a borrower is working with a bank who won't allow secondary financing and doesn't have the equity the bank requires without secondary financing, his choices are to stick with the bank and bring in an equity partner or replace the bank with a hard money lender who will allow secondary financing. Hard money will undoubtedly be much less expensive than bringing in an equity partner.
Additionally, hard money is not too expensive if a borrower can use the funds to quickly take advantage of a deeply-discounted purchase price or to accommodate a partner who wants out of the business relationship.
The key for any borrower/investor is to focus on the global picture. The cost of borrowed capital is only one of many factors to consider.
Hard Money Myth #4
Fact: While the collective wisdom, even among real estate and mortgage professionals, is that hard money lenders make risky loans, our experience is that the opposite is true. Because hard money lenders are often lending their own money (as opposed to a bank employee lending someone else's money), they are particularly risk averse. Unless a hard money lender really understands how to value the collateral securing the loan and understands the prevailing market, he will likely not make the loan, regardless of the strength of the borrower or the LTV. On the other hand, with understanding comes knowledge, and a hard money lender may make a loan that others consider risky because he simply has better information.