Hard Money Lending in Houston Explained

Hard money is one of the most misunderstood tools in Houston construction and real estate. People hear the rate and the points and they panic. They forget that hard money is not a mortgage. It is a short-term, asset-based bridge designed to fund a specific project for a specific period of time. Used right, it is one of the most useful tools in the kit. Used wrong, it eats deals alive.

What Hard Money Is

Hard money is short-term financing secured by real estate. The lender focuses on the asset, not the borrower's credit profile or income. Typical loans run six to eighteen months. The lender expects to be paid off through a sale or a refinance, not through monthly amortization.

Typical Houston Hard Money Terms

• Loan to cost (LTC): 70 to 80 percent
• Loan to ARV (after-repair value): 65 to 75 percent
• Origination points: 1 to 3 points
• Interest rate: 10 to 13 percent in 2023
• Term: 6 to 18 months, often with extension options
• Draw schedule: typically 4 to 6 draws tied to construction milestones
• Personal guaranty: usually required
• Credit minimums: most Houston hard money lenders want a 620 or above, some flex lower

When Hard Money Makes Sense

Hard money makes sense when the deal needs to close quickly, when the borrower does not fit a bank's box, when the property is not yet bankable (a teardown, a vacant lot, a fixer), or when the spread between purchase plus rehab and ARV is wide enough to absorb the cost of capital.

When It Does Not

Hard money does not make sense when the project barely pencils to begin with. If you are squeezing a 6 percent margin on retail comps, hard money will eat the margin and leave you with nothing. It also does not make sense when the borrower has no clear exit plan. Hard money assumes you will pay it off within a year. If you cannot, you are paying extension fees and watching the interest clock run.

Types of Hard Money Lenders

I am not going to name specific firms. The categories matter more than the names. There are four types of lenders that operate as hard money in Houston:

• National hard money funds. Capital pools that lend across multiple states. Standardized terms, faster underwriting, less flexibility.
• Regional Texas hard money lenders. Texas-focused. Know the local markets. Often more flexible on the file. Slightly higher pricing.
• Local Houston private capital groups. Smaller pools, often run by experienced developers. Underwriting is judgment-based. Fast when they like the deal.
• Individual private lenders. One person. One check. Negotiated terms. The cheapest and the slowest, depending on the relationship.

How to Structure a Deal That Hard Money Will Close

A loan officer at a hard money lender wants to see three things. A clear purchase price (or land basis), a realistic scope of work with a line-item budget, and a defensible ARV supported by comps. If you bring those three documents to the table on day one, you cut your closing time by half.

What I Watch For Personally

I watch the total cost of capital, not just the rate. Two points and 11 percent for nine months is different from one point and 12 percent for twelve months. Run the math on the actual cost in dollars from close to payoff. That is the number that matters.

Where to Learn the Houston Version

At Coffee & Construction Houston, we walk through real hard money term sheets and real BEDDIEO project numbers. The room is The Construction Lounge. The work behind the room is BEDDIEO Construction & Design. You can also read about my work as a Houston developer.