The Importance of a Good Exit Strategy for Hard Money Loans
Hard money loans are a convenient solution for investors looking to fund real estate quickly. However, an exit strategy for hard money loans is one of the most important factors in getting one. Lenders will want to see that you have a good plan for paying off the loan at the end of the term. So today, we’ll go over the importance of proper organization and common types of exit strategies for hard money loans.
Contents of This Article:
- Process of Getting a Hard Money Loan
- What Is an Exit Strategy?
- Why You Need an Exit Strategy for Hard Money Loans
- Common Types of Exit Strategies for Hard Money Loans
- Connect With a Local Lender Today
Process of Getting a Hard Money Loan
Getting a hard money loan with our Baltimore hard money lenders is quite simple! As long as you have the correct documentation and a solid plan in mind, you can apply for a hard money loan today. Here are the steps you’ll need to follow.
- Initial Application- The first step in getting a hard money loan is filling out the initial application. Once you fill out an application with some basic information, you’ll be contacted by a lender to talk further about the potential deal.
- Documents- Once a lender approves your application, you must gather several documents. For instance, you’ll need copies of tax returns, the sales contract, your driver’s license, bank statements, and information about the property you’re looking to fund.
- Property Inspection- After providing the necessary documents, you’ll need to get a property inspection and valuation.
- Insurance and Closing- To ensure everything goes smoothly for everyone involved, you’ll need to get General Liability Property Insurance equal to the total loan amount. Depending on your plan for the investment, you’ll need other types of insurance. For instance, if you’re rehabbing a property, you may need a Builder’s Risk Policy.
- Construction Escrow- If you’re taking out a construction loan or using a hard money loan for rehab, you’ll need a construction escrow. As each construction phase is done, you’ll need a property inspection before the draw is released.
- Exit Strategy- The last phase, your exit strategy, is the most crucial. You’ll want to either sell or refinance the property within the loan terms to ensure your lender receives a full loan payoff.
What Is an Exit Strategy?
One of the most important factors in getting a hard money loan is having a good exit strategy in mind. An exit strategy is a plan for how an investor will remove themselves from a deal or pay off the loan at the end of the term.
Real estate investors or developers often use hard money loans when they need quick financing to secure a property. However, they’re generally more expensive than traditional loans due to high-interest rates and shorter repayment terms.
To minimize risks associated with hard money loans, borrowers must have a clear exit strategy in place. Whether you plan to sell the investment or refinance your hard money loan with a more favorable loan, it’s crucial to have a plan in mind.
Your exit strategy should be realistic and feasible, considering your financial situation, the property market’s value, and your loan terms. Next, we’ll review what may happen if you fail to repay your hard money loan in time.
Why You Need an Exit Strategy for Hard Money Loans
Before taking out a hard money loan, you must show your lender exactly how you plan to pay off the debt. Most hard money loans have short repayment periods and high-interest rates, so you’ll need to figure out how to pay it off, sometimes within a year or less.
Without an exit strategy, borrowers may find themselves unable to pay the loan on time. Unfortunately, this can lead to foreclosure or legal consequences. Additionally, borrowers who fail to repay their loans in time can damage their credit scores, making it harder to get a loan in the future.
Ultimately, having an exit strategy in place is crucial for hard money loans because it helps borrowers avoid financial consequences. Additionally, it ensures hard money lenders that they will receive the total borrowed amount in full at the end of the loan term.
Common Types of Exit Strategies for Hard Money Loans
There are several types of exit strategies for hard money loans. For instance, some investors plan to fix and flip a property, which includes renovating a run-down property and flipping it for a profit. With their profits, they can pay off the loan in full. However, this isn’t the only viable strategy. Here are a few different exit strategies that work well for hard money loans.
- Sell the Property to Pay Off the Loan
- Refinance With Another Loan
- Sell Assets to Repay the Loan
Sell the Property to Pay Off the Loan
One viable exit strategy for hard money loans is selling the property that secures the loan. Using the proceeds from the sale to repay the loan in full is ideal for investors who complete renovations for a fix-and-flip investment. However, it’s important to achieve a market value increase in the property and generate a profit that can cover the loan repayment and any other costs associated with the loan.
Refinance With Another Loan
Another exit strategy includes refinancing your loan with a new financing option with better terms and using the funds to repay your current hard money loan. This strategy is helpful for borrowers anticipating better credit or financial circumstances in the future, allowing them to secure a less expensive loan. Additionally, refinancing enables borrowers to extend the repayment term, potentially decreasing the monthly payments and having more time to repay the loan.
Sell Assets to Repay the Loan
Finally, some investors plan to repay their hard money loans by selling other assets. Selling assets to repay a hard money loan is a viable exit strategy for borrowers who have other liquid assets that they can sell to repay the loan. For instance, stocks, bonds, mutual funds, or other investments with high resale values are good options for investors looking to raise funds to repay a hard money loan. In addition, it allows the borrower to repay the loan quickly without having to wait for the sale of a property or going through the refinancing process.
Connect With a Local Lender Today
Hard money loans are excellent for investors that don’t qualify for traditional mortgages or want to fund their property quickly. However, having an excellent exit strategy for hard money loans is crucial for both investors and lenders. After all, lenders need to ensure that the loan will get paid off in time and investors to prove their plan to do so.
If you’re looking to get a hard money loan, you’ll want to look for a local lender to fund your investment. Maryland Hard Money Lenders offers hard money loans for investors that want to fix and flip properties, fund rental properties, or explore new construction. Contact us today to complete a loan application and learn more about our lending process.