Nationwide hard money lenders get hundreds of loan requests on a monthly or even weekly basis. What separates the good from the bad and the fundable from the disposable can be somewhat of a fine line, but there are some broad characteristics that can shift a loan request from one of these categories to the other. One of the most common loan request types is the "100% financing purchase money loan." Real estate investors across the country are attempting to buy investment property for what's believed to be pennies on the dollar from their peak values, but sometimes they get a little bit lost when it comes to sourcing the capital to complete the deal. Aside from the fact that a 100% loan is a risky venture for any lender, there are some philosophical reasons why 100% financing just doesn't make sense.

There's a common acronym that floats around investor circles, and most people are familiar with it: O.P.M. It stands for "Other Peoples' Money." It's widely preached that you don't have to necessarily have any of your own money to purchase investment real estate (which is somewhat true in certain situations, but we're talking in a general sense for the purpose of this article). If you don't have it, just use somebody else's! And guess who the "somebody else" is that pops to the front of everyone's mind - hard money lenders. After all, a hard money lender will just look at the value of the property and as long as it's being purchased at a big discount from yesterday's value then they'll provide all the capital needed to complete the project, right? There was a time when the answer was "yes," but it's just not that way anymore. 100% financing was a monster that was created by the real estate boom and here are the reasons why 100% financing doesn't work for today's established hard money lender. 

1. Cash-in is Equivalent to Risk

Say that two investors purchase a property together with cash and each one contributes 50% of the capital required to complete the deal. How much risk has each one taken in the project? The answer is that each one has taken 50% of the risk because they each have an equal stake in the project. Now say that an investor brings a project to a hard money lender for funding and the hard money lender provides 100% of the cash necessary to purchase and complete the project. How much risk has the lender taken in the deal? The answer is 100%, which means that since the lender took on all of the risk then the investor must have taken on 0% of the risk. They had nothing to lose in the deal because they never contributed anything in the first place. Does that sound like a good deal for the hard money lender?

2. Hard Money Lenders are Investors Too

Often times, borrowers think that hard money lenders are like banks. Investors think that they're just big computers that spit out money when a loan scenario fits into an equation, and that's just not the case. Hard money lenders are investors, and generally very savvy ones at that. If there are such great deals to be purchased, why would they lend a borrower all of the money to buy it and let the borrower keep all of the profits? They wouldn't. A hard money lender would go find their own deals to purchase, keep control of the transaction, and realize all of the profits.

3. 100% Financing isn't a Candidate for a Secured Loan

On the other hand, let's say that a borrower does have hold of a very attractive deal and is looking for the capital to make it happen. A hard money lender sees the value in the deal and thinks that it has some nice profit potential. Do you think that just because the lender sees value in the deal that they're going to go through with it? The answer again is "no, they're probably not going to lend the money." The reason is simple and relates to number 1 above: a hard money lender isn't going to take all of the risk in a transaction for a borrower. However, what they may propose is a joint venture - a structured partnership whereby the lender will take over certain control of the transaction, as well as a hefty share of the profits. A hard money lender knows that with risk there should come reward. A joint venture project is significantly more risky than a well-secured loan, and if they're bringing in all or even a large portion of the cash required for the deal then you better believe that they're going to want most of the profits. 

4. The Market isn't Right

Hard money loans, like any other product, are subject to the market forces of supply and demand. In 2006, the market dictated that if hard money lenders wanted to stay in business they had to make 100% loans. Borrowers could get access to capital just about anywhere and for just about any reason, so if a lender wasn't willing to lend 100% of a property's value then it's highly unlikely that anyone would borrow from them. Supply was extremely high and more than sufficient to meet demand. Today's market is very different. There are very good lending opportunities that aren't being funded simply because there aren't enough lenders to fund them. Demand is high and supply is very low. A 100% financing request isn't a desirable loan scenario for any hard money lender. So, if your loan scenario is generally undesirable you can bet that there are other loan scenarios available to fund that are more attractive than yours. Which one is going to get the money? Here's a hint: not yours.

It's easy to believe that just because there are good deals available in the real estate marketplace that money will just be thrown into borrowers' laps because they're able to find them. Unfortunately, that line of thinking can lead to a lot of wasted time and even more frustration. Investors need to approach hard money lenders with one of two things: capital to contribute (skin in the game) or other collateral to offer (also skin in the game). If investors don't have anything at risk in the transaction then it's simply not a winning scenario for a hard money lender - philosophically any way.