Hard moneylenders have been widely used by investors to buy as well sell property. A hard moneylender is a private lender who will provide financing for projects. The terms are strict and the loan repayment schedules are clearly defined. Typically these loans have low loan-to-value ratio higher than normal interest rates and points. The lenders usually loan only about 50% to 70% of the after repair value of homes, with interest rates ranging between 12 and 16% and 2 to 10 points charged as a financing fee. These lenders loan even to people with a very bad credit history, they are more concerned about the collateral rather than the credit history. These loans are usually one year to 3 years in duration. 

The hard moneylenders look for a detailed explanation why the loan is to be used, how it will be repaid, the LTV based on an assessment of the property. Detailed information about the property is needed such as the address, accurate estimate of any repairs due personal credit checks are done by some others require tax returns as well as bank statements in order to get the loan. Hard money loans have certain advantages such as providing 100% funding, are granted quickly helping investors close deals where time is of the essence, banks tend not to finance unconventional projects where as hard money loans can be secured easily.

Discounted Notes
Paul has a mortgage note of say $20,000 to be paid by Andrew, which yields $2,000 annually. He needs cash urgently perhaps to meet a medical emergency so decides to sell the mortgage note at a discount of say $2,000. Peter buys the note valued at $20,000 by paying $18,000. Peter has thus made a profit of $4,000. Peter need not worry much as Andrew will pay him regularly as he has no financial difficulties!

Investors use discounted mortgage notes to creatively buy property. Let us consider Nick who buys a discounted note worth $400,000 at say a price of $360,000. Nick uses the $400,000 note as collateral to buy a property worth $400,000 there by buying the property by paying only $360,000! Caution is necessary to endorse the note in your name by getting it in writing from the previous owner.

Some investors tend to invest in fractioned notes where they buy a fraction of a good note usually when to people own the note and one of them wants to sell his half. At such times care should be taken to ensure both owners endorse without recourse, the note in the investors name otherwise he may have legal trouble proving his ownership.

Lending Hard Money Loans Vs. Accepting Discounted Notes
People who do not have any other credit options left or those who need money urgently to close deals use hard money loans. They are high risk investments unless secured by collateral but a lot of due diligence is required to verify there are no other liens against the property used as collateral. Hard money loans are governed by state laws regarding the cap on interest rates charged it could be usury to charge higher rates. The APR has to be disclosed to the customers not doing so could be a punishable offence. You cannot possibly sell a hard money loan at a profit. Income from hard money loans come from the fee charged plus interest. Once the amount is repaid, it will be some time before lending it again involving advertisement costs etc. yields on hard money loans are hard to perk up. You could be taking a risk offering a hard money loan to a person, as you really have no idea if he will repay on time or not.

Discounted notes are more secure as the seller is in need of the money not the one making payments on the note. Since they are got at a discount the yield is high which is not the case if you gave a hard money loan equaling the amount paid for the discounted note. If an investor wants to he could buy a discounted note with high yields and not worry about usury charges! There are no laws that govern discounted mortgage notes. Notes could be resold yielding less yet the investor could make a huge profit. Acceleration of the discount causes a substantial leap in the expected yield. Discounted notes can be used in such a way as to triple the yield in some cases. They are more trust worthy as you could select notes where payments have never been defaulted ensuring your investment is secure.

Thus when hard money loans are up against investing in discounted notes, some investors are of the opinion that investing in discounted notes are more secure investments, with a greater potential for profit and higher yields.

 

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