The DMV market is full of real estate investment opportunities that state: Investor Special. Cash Only. This “cash-only” requirement is the driving force behind the most common question about our industry: Is a hard money loan considered cash or not?
I understand the source of confusion. Cash implies a certain amount of money that you already have in your possession. In contrast, a loan means that you’re using borrowed funds because you either don’t have cash or choose not to use it. Hard money loan is not cash, but there are instances when it’s considered its equivalent. One of those instances is making an offer on a distressed property.
When pursuing real estate investments like flipping houses or acquiring commercial property, having ready access to capital is crucial for seizing promising opportunities. But not all investors have abundant cash reserves or want to tie up their own money in deals. This leads to a common question: Can you use a hard money loan in place of cash for real estate purchases?
While hard money loans offer a fast financing alternative to traditional mortgages they differ significantly from cash transactions. Examining the key characteristics of each option provides clarity on why hard money loans cannot equate to cash when buying or investing in real estate.
What is a Hard Money Loan?
A hard money loan is a type of short-term financing issued by private investors rather than banks or credit unions. Typical hard money loan features include
- Backed by the real estate as collateral
- Higher interest rates and fees than conventional loans
- Faster approval and funding in days or weeks
- Requirements based on property value rather than borrower credit
Hard money loans work well for real estate investors flipping houses or acquiring commercial buildings. The quick access to capital allows them to close rapidly when opportunities arise.
Since hard money lenders focus on the real estate itself when approving loans, borrowers can often qualify despite having poor credit or insufficient income to get a traditional mortgage However, hard money loan terms are less favorable, with higher rates and borrowing costs
What Constitutes Cash in Real Estate Deals?
Cash in real estate transactions refers to money the buyer already has on hand through personal savings, business revenue, investments or other assets. Unlike financing, which represents borrowed money, cash equals liquid funds immediately available to exchange for property.
Paying the full price in cash provides maximum negotiating leverage and certainty for sellers. It removes contingencies like getting financing approved or having banks appraise the property. The deal closes once the cash physically changes hands.
Beyond having cash to afford the entire price, buyers may also leverage cash to:
- Make large down payments, with a mortgage for the remainder
- Cover appraisal gaps if a home appraises for less than the offer price
- Pay above listing price to beat out other offers
- Tempt sellers with non-refundable cash earnest money deposits
Using ample existing cash resources demonstrates financial strength and seriousness to sellers.
Why Hard Money Loans Don’t Equal Cash
Though hard money loans allow buyers to act quickly, they differ from cash in several key ways:
Must be approved and funded by lenders – Unlike pure cash transactions, hard money loans require underwriting, documentation, and funding processes. If the lender deems the deal too risky, financing could fall through.
Involve borrowed money – Cash represents the buyer’s own funds, while hard money loans use capital supplied by a financing company or individual investor. The buyer must repay the loan per the set terms.
Have set repayment timelines – Hard money loans typically have short 1- to 5-year repayment terms, at which point the balance must be paid back in a lump sum. Buyers don’t have full ownership until the loan is satisfied.
Require collateral – The real estate being purchased serves as collateral for hard money loans. Defaulting could lead to foreclosure and loss of the property, unlike paying cash upfront.
May not satisfy “cash-only” sellers – Some sellers explicitly state “cash-only” offers to reduce uncertainties of financing. They may not readily accept hard money loans even though financing is in place.
Can limit negotiating power – Buyers paying all cash have maximum leverage to negotiate price and terms. Hard money financing inherently creates contingencies that could weaken the buyer’s position.
While hard money loans facilitate quick real estate purchases, the need to qualify, repay on set schedules, and risk losing the property keep them distinct from having cash on hand. These differences make hard money loans an inferior option when sellers prefer or demand cash transactions.
Pros and Cons of Hard Money Loans vs Cash
| Hard Money Loan Pros | Hard Money Loan Cons | Cash Pros | Cash Cons |
|---|---|---|---|
| Fast access to capital | Higher rates and costs | Strong negotiating position | Reduced buying power |
| Purchase property without cash | Risk of foreclosure if default | Certainty for sellers | No leverage benefits |
| Leverage benefits | Short repayment timeline | Ownership without debt | Lower immediate returns |
| Buy when can’t get mortgage | Lender approval required | Flexibility in deals | Large cash outlay tied up |
Both options have advantages in real estate acquisition. But the unconditional benefits of cash make it difficult to equate with hard money loans.
Key Takeaways: Hard Money Loans vs Cash
When pursuing real estate investments, buyers should understand the critical differences between hard money loans and cash:
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Hard money loans require approval – Unlike cash, financing must be obtained from private lenders based on collateral worthiness. Deals can fall through if lenders don’t approve loans.
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Loans use borrowed capital – Cash represents the buyer’s own liquid assets, while hard money loans leverage financing from third-party sources that must be repaid.
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Cash has no strings attached – Paying the full price in cash means owning the property free and clear. Hard money loans have repayment schedules, interest costs, and foreclosure risks if defaulted.
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Cash delivers unconditional negotiating power – Cash offers demonstrate seriousness and remove uncertainties related to financing. Hard money loans may not satisfy sellers demanding cash-only transactions.
While hard money loans allow swift real estate deals, they ultimately differ too much from pure cash transactions to be considered a cash equivalent. Understanding these key differences helps set proper expectations when pursuing financing.
Sellers prefer all-cash buyers because it eliminates financing contingency.
A seller’s goal is to sell a property to a buyer who has both the means and the will to pay the highest price. In real estate, however, where there’s a will there isn’t necessarily a way. A buyer might be willing to pay the highest price but not be able to come up with sufficient funds to do so. Loans get denied all the time, and the sellers know that. Their challenge is to identify those buyers who are more likely to close. The weaker the buyers (those with low credit scores, borderline income-to-debt ratios, minimum downpayment), the less likely they are to qualify for a loan. In contrast, the strongest buyers are those who don’t require any type of financing and can pay cash. Not only they’re virtually guarantee to close, but they can also do it quickly.
However, when a listing specifically asks for a cash-only buyer, it’s not to make sure that a buyer is strong enough to qualify for a loan. It’s because the seller knows that the property itself cannot qualify for financing. Traditional lenders don’t lend on properties that are distressed. However, the majority of properties that would interest an investor are in various stages of disrepair. A buyer can walk on water but it’s not enough. They still wouldn’t be able to get a traditional loan.
Hard Money Lenders Explained – How To Properly Find & Utilize Them
FAQ
Is a loan considered cash?
What is a hard money loan also known as?
Is a hard money loan considered conventional?
What are the terms for a hard money loan?
How long does a hard money loan last?
Most hard money lenders can lend up to 65% to 75% of the property’s current value, and loan terms are generally short: six to 18 months. Hard money loans may be sought by property flippers who plan to renovate and resell the real estate that is used as collateral for the financing—often within one year, if not sooner.
What is a hard money loan and how do they work?
A **hard money loan** is a type of loan that is secured by real property.It is often used as a short-term financing option for real estate transactions, with the lender generally being individuals or companies
Is a hard money loan a good option?
If you are looking for a fast, secure alternative to a traditional mortgage loan, a hard money loan may be the best option for fast cash and a quick approval process.
Are hard money loans more expensive?
Hard money loans have much higher interest rates, typically around 8% – 15%. Hard money loans can also be more expensive depending on the lender’s preferred loan-to-value ratio (LTV). If a lender will only finance 70% – 80% (or less) of a property’s value, you’ll likely need to bring a sizable down payment to the closing table.