Hard Money Loan vs. All Cash Offer

Written by J. Hirby and Fact Checked by The Law Dictionary Staff  

When individuals are interested in buying real estate to renovate and resell, conventional bank loans may not be the most expedient way to close the deals. Hard money loans and all cash offers are two fast and flexible alternatives when purchases must be completed in a short period of time. These two methods approach the real estate buying process from two opposite ends. The process a buyer uses will depend on the borrower’s individual financial situation. Both processes have pros and cons that a potential buyer needs to understand.

<strong>HARD MONEY LOANS</strong>
Pros: Loans are flexible and quickly approved. Lenders rely more on the profitable resale value of the property than on a borrower’s personal credit score and financial issues. Lenders want their loans to become the first mortgage on the property so that if the borrower defaults, the lender’s loan will be paid first when the property is sold.

Cons: Lenders charge a high interest rate and more points than conventional loans. Loans are for a short period of time, generally from a few months to a few years. If the borrower does not sell the property in that amount of time, new financing must be found.

<strong>ALL CASH OFFERS</strong>
Pros: A buyer who purchases real estate with all cash will not have a mortgage and does not have to pay interest and points. Unless the buyer requests validation of the property’s marketable price, there is no need for inspections and appraisals. The buyer can get a letter of funds from a bank stating that the buyer does have the money on hand and the letter can be used to prove to a seller that money is available to close the deal. The letter will be based on funds in the buyer’s savings accounts, retirement accounts, checking accounts, CDs, cash from investments, cash value from life insurance policies, and cash value of equity in other properties.

Cons: Buying real estate for cash will require the buyer to take one of two actions to close the deal. The buyer will either be confining access to his personal funds or he has borrowed from other sources to acquire the cash. If the buyer is actually using someone else’s cash or has taken a loan against a life insurance policy, or obtained a cash loan from equity in other properties, the buyer will still be making some form of payments until the property is resold.

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