If you have ever tried to secure a hard money loan, have you noticed that some lenders only lend on certain types of properties? One hard money lender might focus exclusively on commercial properties like office buildings and strip malls. Another might focus heavily on the fix and flip market. Still others might prefer to invest in residential apartment complexes. But why?
The first thing to understand is that lenders of all stripes tend to key in on certain areas. The reasoning is simple: lenders cannot be all things to all people. There are so many different areas in which a bank or private lender could put its money. Trying to cover every need imaginable is just too much.
Real Estate is Complex
The number one reason some hard money lenders focus on certain types of property could very well be the complex nature of real estate. You need to remember that both lending and real estate transactions are governed at the state level. And because we have 50 states, lenders potentially have 50 different sets of laws to follow. That could get confusing.
Lenders need to account for how the law says their loans should be structured. There are different loans for different kinds of properties. There is also the issue of writing a traditional loan versus loaning on a deed trust transaction. These are all things hard money lenders not only have to be familiar with, but also know inside and out. There is just a lot to keep track of.
Real Estate is Also Risky
In addition to being complex, real estate is also risky from a lending standpoint. A retail bank or credit union could lend several hundred thousand dollars just to purchase a modest family home. When you are talking about a hard money lender offering to help an investor acquire a commercial property, they could be looking at sending millions out the door.
The reality in hard money is that some property types are more risky than others. Take residential fix and flip properties as opposed to a 10-building apartment complex. Despite writing a more costly loan to obtain the apartment complex, some hard money lenders would rather fund its acquisition than fix and flip properties.
Actium Partners, out of Salt Lake City, UT, is an example of a hard money firm that stays completely away from fix and flip deals. As for funding apartment complex acquisitions, that’s right up Actium’s alley.
Lenders Don’t Want to Be Property Owners
Yet another reason lenders are choosy about the projects they loan for is the fact that they do not want to be property owners. Despite what you may believe, your average hard money lender is not a predatory lender hoping that the client will default so his or property can be seized at a lower price. Rather, hard money lenders seek to avoid owning properties at all costs.
Becoming a property owner – even temporarily – is always a risk when you make hard money loans for real estate transactions. Some hard money lenders just feel as though certain types of properties are too risky. They fear that getting involved will ultimately mean becoming a property owner, and that’s something they absolutely want to avoid.
On the positive side, it is possible to find hard money lenders willing to lend on just about any property type. All of them do not lend for all properties, but pretty much all properties are covered by at least a handful of lenders. The bottom line is that hard money is available for most commercial real estate transactions.