A hard money
loan is a species of real estate loan collateralized against the
quick-sale value of the property for which the loan is made. Most
lenders fund in the first lien position, meaning that in the event
of a default, they are the first creditor to receive remuneration.
Occasionally, a lender will subordinate to another first lien position
loan; this loan is known as a mezzanine loan or second lien.
Hard money lenders
structure loans based on a percentage of the quick-sale value of
the subject property. This is called the loan-to-value or LTV ratio
and typically hovers between 60-70% of the market value of the property.
For the purpose of determining an LTV, the word "value"
is defined as "today's purchase price." This is the amount
a lender could reasonably expect to realize from the sale of the
property in the event that the loan defaults and the property must
be sold in a one- to four-month timeframe. This value differs from
a market value appraisal, which assumes an arms-length transaction
in which neither buyer nor seller is acting under duress.
Below is an
example of how a commercial real estate purchase might be structured
by a hard money lender:
65% Hard money
20% Borrower equity (cash or additional collateralized real estate)
15% Seller carryback loan or other subordinated (mezzanine) loan