Real Estate Crowdfunding or Hard Money Lending?

S Nakra

“The Americas online alternative finance industry grew to $36.49 billion, a 212 per cent annual increase from the $11.68 billion in 2014” University of Cambridge

 

Before we discuss the differences between hard money lending versus real estate crowdfunding, we should examine why these two real estate loan options exist. Not even a decade ago, in 2008 the world economy faced a devastating financial crisis the likes of which has not been seen since the Great Depression of the 1930s. And, it began here in the United States when home prices plummeted downward in 2007. How did this happen? Primarily due to shady mortgages offered to people who couldn't afford them and those greedy deals spilled over into the insurance and credit industries. Once home owners couldn't afford to pay their mortgages and started to default on their loans, the housing market tanked. This started a domino effect, first it crippled the U.S. financial sector and then spread quickly to global financial markets.

 

In February of 2009, after congress passed the American Recovery and Reinvestment Act of 2009, real estate investors found themselves in a pickle. Financial institutions now had to adhere to more stringent underwriting standards enforced by the U.S. government. Many real estate investors whom had impeccable mortgage payment histories and were loyal for years to their local banks and financial institutions were now being turned down by them. Enter private or hard money loans (see below).  The appeal of hard money loans is that many of them were “asset-based loans” with much more straightforward underwriting guidelines than those by the banks and other big financial institutions. The down side of hard money lenders is that lenders are charged anywhere from 10-15% interest and 2-7 points to originate real estate loans for borrowers. You lose or win, lender will always win.

 

Are these the only two options for real estate investors? Either having to pay such a high price to invest in property from hard money lenders or go through a painfully long loan process or just turned down by the banks altogether? In 2013, a new real estate funding option arose offering speed and efficiency called real estate crowdfunding. Utilizing technology and the Internet, real estate crowdfunding gathers a group of investors to fund specific real estate opportunities at a considerable lower cost than hard money lenders or banks with lower interest rates and origination costs and often times 200-600 basis points cheaper than private hard money lenders.

 

Today, real estate crowdfunding has evolved from low level peer-to-peer micro-lending to becoming a technology fueled platform for raising real estate capital. Whether it's a new home, fixing an old one, building a new office building, or an entire community from the ground up, Equity Brick is one such company offering an online Texas real estate crowdfunding platform. Equity Brick enables first time and veteran investors and borrowers an opportunity to tap into the growing Texas real estate market without the hassles and costs like those of financial institutions or hard money lenders. And, it can be done right from the comfort of their own homes.

Hard Money Loans

What does "hard money" mean? Hard money is actually a political term and it relates to contributions given to a political candidate in an election to assist with their political campaign but when referring to lending it means something else. In the loan and investment world, money is referred to as being "soft" or "hard". Typically, soft money loans are easier to qualify for and the terms are flexible. Hard money loans, are the opposite the terms are very specific and financial histories may be scrutinized. Hard money loans come from private individuals with very deep pockets; this is why hard money is also referred to as "private money". Most hard money lenders primarily qualify a loan amount based on the value of the real estate being collateralized. Typically, the biggest loan one can expect would be between 65% and 75% of the property value. That is, if the property is worth $100,000, the lender would advance $65,000 - $70,000 against it. This low LTV (loan to value) provides added security for the lender, in case the borrower does not pay and they have to foreclose on the property. Although, many hard money lenders require more than just equity to qualify.

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