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Exiting a Hard Money Loan: There Isn’t Just One Way to Do It

When you apply for a conventional loan, like a mortgage for example, you pretty much know how everything will play out. You will continue making monthly payments until you complete the 30-year deal or sell the house and pay off the loan with the proceeds. Hard money is a bit different. It is different enough that borrowers need to bring an exit plan to the table.

The interesting thing about exiting a hard money loan is that there isn’t just one way to do it. The experts at Salt Lake City’s Actium Partners say that lender and borrower can agree to any exit plan that makes them both comfortable. From the lender’s perspective, however, an exit plan must be both reasonable and doable. Otherwise, it is not worth the paper it is printed on.

How Hard Money Loans Work

Actium explains that hard money loans are private loans offered for comparatively short amounts of time. Where conventional loans can have terms of 15-30 years, a typical hard money loan has a term of 6-24 months. That is pretty short.

Most hard money loans are also structured as interest-only loans. For the life of the loan, the borrower only pays interest on a monthly basis. The final interest payment is due, along with the entire amount borrowed, on the loan’s maturity date. This is why an exit plan is necessary.

How the Borrower Is Going to Pay

An exit plan explains how the borrower is going to pay back what he borrowed. So let’s say you have a real estate investor who specializes in fix-and-flip residential properties. He funds new acquisitions with 6-month hard money loans. What is his exit plan? To get a new acquisition back on the market within 3 months, selling it in time to repay his loan within the 6-month term.

It goes without saying that some exit plans look better than others. But an exit plan is more than just a plan for repaying what was borrowed. It is also a plan for moving on with the investment after the loan has been paid off.

It’s not unusual for investors to structure their exit plans around meeting other financial objectives. The important thing for the lender is getting paid on time. There are multiple ways to do that and simultaneously enhance the borrower’s financial position.

Examples of Common Exit Strategies

As previously stated, an exit plan can be any plan both parties agree on. But given that most hard money loans are designed to support real estate transactions, there are some pretty common exit strategies lenders see all the time. They include:

  • Property Sale – Selling a property before its loan comes due is pretty straightforward. This strategy is common among fix-and-flip investors in both residential and commercial real estate.
  • End-of-Term Sale – Some property investors are not interested in the fix-and-flip game. Instead, they intend to hold a property for a couple of years. The strategy works well when an investor can get a hard money loan with a 36-month term. Thanks to higher property values, he can sell 3 years after purchasing and make a good profit.
  • Conventional Financing – Property investors often rely on hard money to acquire new properties, then turn around and obtain conventional financing to pay off their loans.

These three strategies by no means constitute the entire list of options available to investors. There are plenty of other excellent strategies both lenders and borrowers can consider. The point in all of this is to say that an exit plan is necessary to obtain a hard money loan.

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