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.
Hard money loans are a popular financing option for real estate investors looking to fund fixer-upper properties or close quickly on a hot deal But a common question is, are hard money loans actually considered the same as cash when making an offer?
The short answer is sometimes, but not always. Hard money loans have some cash-like qualities that make them a useful alternative financing solution. However, there are also key differences between hard money and cash that investors should understand.
When Hard Money Loans Act Like Cash
There are a few scenarios where hard money loans can be considered equivalent to cash
1. “Cash Only” Listings
Some distressed properties are in such poor condition that sellers will only accept cash offers. Banks won’t finance properties with structural damage, deferred maintenance, or other major issues.
But hard money lenders will fund these types of fixer-uppers based on the projected after-repair value. So investors can make competitive cash-equivalent offers, even if they don’t have the cash upfront.
2. Fast Closing in a Seller’s Market
In a hot seller’s market, contingency-free cash offers have an advantage. Sellers often want to close quickly so they aren’t left contingent on finding their next home.
Hard money loans can close in as little as 5-10 days in some cases. This speed positions them favorably against buyers needing 30+ days to close with a traditional mortgage.
3. Distressed Sellers with Deadlines
Some sellers need to liquidate properties ASAP to pay debts or meet pressing financial obligations. Cash and fast hard money loans help them meet tight deadlines.
So in scenarios where on-time closing is critical, hard money can replicate cash.
Key Differences Between Hard Money Loans and Cash
While hard money loans can act like cash, there are still some important ways they differ:
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Hard money requires approval – Lenders need to review the property and approve the loan. Cash deals have guaranteed funds.
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Higher costs – Hard money loans charge higher rates and fees than conventional mortgages. All cash has no borrowing costs.
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Shorter terms – Hard money loans generally have 1 year terms. Cash buyers aren’t bound by repayment deadlines.
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Risk of funding delays – Unlike cash, hard money loans can occasionally hit snags that push back closing.
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Seller objections – Some sellers specify “cash only” to avoid financing entirely. They may not accept hard money loans.
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Hard money loans can substitute for cash when fast close is critical.
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But key differences remain between hard money loans and having cash readily available.
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Hard money should be viewed as a leverage tool for investors, not a total cash equivalent.
Tips for Using Hard Money Loans
If you’re considering financing real estate investments with hard money loans, keep these tips in mind:
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Vet lenders carefully – Find an experienced hard money lender who can deliver on quick close timelines.
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Understand risks – Leverage magnifies gains but also losses. Manage lending risks smartly.
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Compare costs – Hard money is expensive. Run the numbers to ensure deals pencil with borrowing costs.
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Have backup plans – Cash offers fall through less often. Have backup financing options if possible.
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Review terms – Hard money loans have relatively short 12 month terms. Factor in refinancing needs.
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Target wisely – Use hard money only where it provides a clear advantage based on the buyer-seller dynamic.
The Bottom Line
Hard money loans share some cash-like attributes that make them helpful for real estate investors in certain situations. But cash and hard money are not equivalents.
If you approach hard money loans understanding both their capabilities and limitations, they can be an effective financing technique as part of a larger real estate investment strategy. Just don’t assume hard money loans provide all the benefits of paying cash upfront. Evaluate each deal individually to determine if hard money or cash makes the most sense.
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.