Hard money lenders are often mischaracterized as predatory lenders looking to rob people blind. It is a bad reputation they do not deserve. In truth, hard money lenders provide a valuable service to borrowers who either aren’t eligible for conventional loans or would rather not apply for them.
Actium Partners is a hard money lender based in Salt Lake City, UT. The vast majority of their loans go to real estate investors looking to obtain new properties. Actium’s business model is not unusual. By and large, most hard money loans cover real estate transactions that aren’t eligible for conventional financing.
The Actium team explains that most hard money lenders are regulated businesses that demonstrate the utmost integrity in everything they do. So much so that there are three key things that prevent hard money lenders from practicing predatory lending. They are explained below.
1. Multiple Investors Are Often Involved
While there are exceptions to the rule, most licensed hard money firms are funded by a substantial numbers of investors who pool their finances. Actium Partners represents multiple investors to whom they have a fiduciary responsibility. That responsibility prevents them from being reckless.
If you are not familiar with the fiduciary concept, just understand that it’s an illegal doctrine. Those with fiduciary responsibility are required by law to put the interests of those they represent first. Therefore, the Actium team must put the interests of its investors above all else. They cannot be reckless with their loans and still meet their obligation.
2. They Have No Interest in Being Landlords
When an investor defaults on a hard money loan, the lender has little choice but to seize the property as payment. Here’s the thing: hard money lenders generally have no interest in being landlords. If they wanted to be landlords, they would buy their own properties.
To the contrary, hard money lenders prefer to get in and out as quickly as possible. They look to lend and get repaid so that they can go on their way quietly and with a sufficient ROI. Predatory lending would not allow them to do that. They would constantly be faced with properties they had to seize and dispose of.
3. Seizure and Disposal Are Distracting
Seizing and disposing of property in the event of default is something hard money lenders are willing to do. They need to do it in order to meet their fiduciary obligations. Nonetheless, seizure and disposal are distracting. They take a lender’s attention away from more important things.
Unless a hard money firm employees staff members whose main responsibility is asset seizure and disposal, whoever is given the task just has more to do. It is an added workload that comes with the pressure of disposing of assets as quickly as possible while maximizing returns. Who would want that job?
Predatory Lending Is a Myth in Hard Money
Pull back the curtain to see how hard money lending really works, and it quickly becomes apparent that the predatory lending concept is a myth. Hard money lenders are not out searching for suckers they can rip off with high interest rates and threats of property seizure. It is just not the way it works. To believe otherwise is to demonstrate a lack of knowledge about hard money.
The vast majority of hard money lenders are legitimate firms managed by financial experts who just happen to be very good at earning a solid return by lending out investor funds. Hard money firms follow strict state rules designed to protect borrowers against predatory practices. Everybody wins despite the many myths surrounding hard money.