Commercial Hard Money Loans are real estate loans based
primarily on the collateral. Real estate collateral is the protective equity in the real estate transaction, and
is the primary factor in qualifying for a Hard Money Loan. These types of loans are typically provided by Private Lenders who are looking for sound transactions based on equity and not on credit scores.
Hard Money Loans are an option when a real estate transaction falls outside the parameters of conventional lending standards of banks, life insurance companies, and other sources of traditional loans. Conventional loans are based on the borrower’s credit and income, but credit and income are not primary factors with hard money loans. Banks have government regulations to contend with, whereas regulatory red tape can be bypassed with Hard Money loans due to their origination being with Private Lenders.
Private Lenders, or Hard Money Loans, are
source of funding for:
•Property acquisition with little or no cash from the borrower.
•Short term cash for development, or to rehabilitate property.
•Investment capital instead of a business partner.
•Transactions that need to close quickly.
•Transactions that don’t qualify for conventional financing.
•Borrowers who don’t have the normal income documentation banks require.
•When other properties, or assets can be provided in tailoring a loan.
•For sound transactions that make sense to use this approach.
Being a Private Lender and not a bank allows the Lender to make
quick decisions. It also allows the Lender to provide more flexibility in structuring the deal. There can be many advantages when working with a Lender that can tailor the
transaction and make quick decisions.
Benefits of using Hard Money Loans
1. Easy Application Process - Private Lenders base their decisions on the current quick-sale market value, the purchase price, and condition of the property being offered as collateral.
2. Uniqueness of the collateral - special use properties and personal property, which are not acceptable to a bank, may be considered by the Private Lender.
3. Flexibility - Private Lenders have the ability to tailor the loan to meet the needs of the transaction.
4. Seasoning - a property without a track record of payments can still qualify.
5. Quick Closings - since the property’s equity is the primary factor, less information on the borrower is required.
6. No Pre-payment penalties - Hard Money Loans are typically used for short-term situations.
7.Therefore, in many cases early payment of the loan does not penalize the borrower.
8.Pre-qualification - allows borrower to be a cash buyer.
Although understanding the benefits, what most borrowers consider the downside of Hard Money Loans is the interest rate.
Yes, the rates are higher than conventional financing, and if
that was the only consideration then Hard Money Loans might not look like a viable means of financing. However, when a borrower is analyzing the entire transaction and not just the expenses, the
borrower may well find the profits far out ways the short term costs. To illustrate this, in a recent transaction a borrower paid what he considered an exorbitant short-term interest rate, but after
$3 million in 30 days in flipping a commercial property, the rate was really inconsequential.
It is the quick and flexible access to capital that makes the borrower money. When considering rates, consider that “time is money.” What are the benefits of a quick acquisition? Does the Hard Money Loan allow the borrower to make money on real estate that would otherwise need to be bypassed?
Many transactions seeking financing, don’t meet the
requirements of a bank loan, don’t have adequate borrower credit, income or documentation, or involve
commercial property that is in some stage of need of repair. These factors increase the risk of the transaction and eliminate the conventional lender as a source of funding. Private Lenders will accept the risk and this is reflected in the interest rate. As in all things financial - the higher the risk, the higher the rate of return.
Instead of forfeiting a deal, work with a Lender that has the
ability to offer alternatives and meet critical time lines. For many commercial borrowers Hard Money Loans have become an alternative source of funding they rely on to
Tips About Pursuing Hard Money Loans:
•Work with Lenders who are themselves Investors instead of bankers. The will have a better understanding of what you need and what you will be faced with.
•Consider the Lenders involvement as a positive. The more feedback they can provide, the more dedicated they are to your project, the better chances of your success.
•Although other real estate and personal assets can be provided
for additional collateral, so you don’t lose everything in the event of a default, consider
properties that have the equity to support the transaction by themselves.
•Ask that the Lender’s process be explained in detail - step by step.
•Use Hard Money Loans when you need: quick closings, have an opportunistic acquisition, rehabbing distressed property, sale/leasebacks, bridge financing, construction, short term financing, transactions that don’t meet normal bank standards, and avoiding foreclosure.
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