COMMERCIAL PRIVATE MONEY LOANS 101
Hard Money Loans are a great and creative way that has made its way in the Money Lending industry over the past few years because of the economy and banks being a lot more careful about their loans, these changes have made Hard Money Loans a great asset to your portfolio, and will certainly help your clients. As loan originators, we have to know all the options the market has to offer and Hard Money Loans can come in handy when there are significant changes in our clients’ lives. However, Hard Money Lenders like ourselves know beforehand that Hard Money Lending is an investor’s world therefore they are not your typical lenders, there are requirements your client must meet in order to close a Commercial Hard Money Loan.
These investors are private individuals, or partnerships; Who are willing to lend money but they will do it as long as the ROI is higher than traditional lenders since their own
capital is the one at risk.
Commercial Hard Money is a much more complex process than Residential Hard Money.
Investors will analyze the borrower like on any other Residential Hard Money Loan but they will pay much more attention to the commercial property, and by that we mean they will look at every detail since there is often situations where there is something unusual about the property or the borrower, That process could bring the transaction to a complex but not impossible Commercial Hard Money Loan.
Most borrowers in need of residential hard money loans have the following reasons :
Lack of employment, low credit scores, personal emergencies, health issues and so on; all of these scenarios sometimes go hand in hand with commercial hard money, plus you have to keep in mind the fact that the income of any commercial property can change or that there may have been a change in the use of the property.
Also your client cloud have pending judgments, liens and bank rejections these may be why he’s opting for a commercial hard money loan.
Our best advice on any kind of Commercial Hard Money Loan transaction is that you must know and understand ALL the reasons and variables that can come into play as why does your client, the borrower need that Commercial Hard Money Loan.
Once you understand your client’s situation you can start to look at all the other factors.
First: The property must have equity. The industry standards are 70% LTV on residences, 65% on apartment complexes, and 50% LTV on land. Very rarely you will see an investor doing Commercial Hard Money Loans over owner occupied, industrial or special use properties.
Equity is what makes a Commercial Hard Money Loan possible, therefore the appraisal will be the main factor to obtain a Commercial Hard Money Loan for your client and he must know that the LTV will determine the risk to the investor, your job is to obtain the must accurate appraisal for the sake of both parties and your reputation as a Commercial Hard Money Originator.
Now that the equity and the LTV has been determined comes the exit strategy or how the borrower will repay the loan, this is of great concern for a commercial hard money lender. They will make sure that the borrower has a realistic plan for repaying the loan, otherwise you’ve wasted everybody’s time.
This all should be explain on a very detail presentation and be submitted to the private investor, partnership or corporation.
These private parties will demand of you to be diligent in providing precise information and paperwork on behalf of your client. Most of them have a list of documents you
must provide along with credit check, income garnered from the property, current title, and expenses of the property.
This step is key, a well presented Commercial Hard Money Loan package will help you earn a good reputation and get the loan for your client.
Go the extra mile, offer investors to inspect the property personally, give them the demographics of the location, traffic, access and information about similar businesses in
the area, and always get environmental reports.
Each investor has its own guidelines but you must go into every loan with the mentality that this must be a win – win situation for everybody otherwise move on to the next
Commercial Hard Money Loan.
COMMERCIAL LOAN MUST HAVE DOCUMENTS
These are the documents that will let know the lender the cash flow of a property and finances of the borrower to support the loan.
It does not matter which type of commercial property you are trying to get a commercial loan or hard money commercial loan.
This general documentation includes.
– Location of the property :
Not only the physical address of the property but also get a copy of the blue prints of the building and information about main roads of access, traffic, general demographics of the area, take pictures and video of the property; why both? with video you can show the size and layout of the property in a continuous mode; where as with pictures you may confuse
the lender about the layout and size of the property.
– The loan specifics and loan request:
Meaning length of the loan, reasons why your client needs the loan, what is the loan going to be used for, and exit strategy.
– The borrower’s profile :
This is where you can show your client’s past experience managing loans and operating
that type of commercial property.
These are the first things you must introduce to the lender or hard money investor.
Always keep in mind a well done introduction and a detail written executive summary is the best way to approach and generate interest from Commercial
and Hard Money Lenders.
The property must be able to cover the debt that will be placed on it. The best way to know this is to apply a debt coverage ratio.
The cash flow from the commercial property must cover at least 1.2 times the debt placed on it.
To confirm this, the lender will require from the borrower to submit detailed financial statements for the property, the gross income and net income, expenses, payroll and utility bills are among the most common documents a commercial lender will require, for the last 24 months, to show that property is stable and has run making a profit.
Third Party Documentation Be prepared to summit or to help obtain some documentation that must be ordered from other parties other than the borrower, or the property itself.
Commercial and Hard Money Commercial Lenders need a clean title so they can have a clean lien placed on the property once the loan is approved.
Most commercial properties are held by corporate entities and are used for business purposes, the Commercial Lender will ask for additional commercial insurance to be placed on the property.
The borrower must show proof of acceptable insurance in order for the loan to close.
There is always a limit as far as the Lending Terms Commercial Lenders have maximum loan to value ratios. Most of them will max out at 80% loan to value, or LTV.
As a loan originator you must determine the value of property first by conducting a BPO (Broker’s Price Opinion) where you will compare the subject commercial property with six similar other properties in the area, three of them recently sold and three similar listed properties, after this is done have an appraisal done on the property. This appraisal must be done within 30-60 days of loan application.
Commercial and Hard Money Lenders requirements vary, it is your job as a hard money loan originator to keep both parties as informed as you possibly can and to collect all the required documents before applying to the lender.
HOW TO PUT TOGETHER A HARD MONEY LOAN PACKAGE
#1 A well written summary including the loan request, investment type, and some of the financial numbers like LTV, LTC, explain how the investment is profitable , and
your exit strategy.
#2. Income and Expense Data– for income producing properties break them down on a yearly basis and provide all the DSCR information.
For construction and rehab projects, expenses and exit numbers go here.
# 3. Realistic Appraisal Get property tax records and an appraiser you really trust.
Nobody likes to deal with an amateur hard money originator or borrower, therefore experience and research is what everyone expects, so go over on a very detail manner about what drew you to this type of investment and the value of the property vs the LTV must be your number one reason.
You must have your current financial statements and if your cash flow, credit or liquidity reserves are low, consider creating a partnership with someone who is more financially secured than you are. Make sure your numbers for vacancy, reserves, and management are realistic because hard money lenders will take these as deal makers or breakers
# 4. Support Documents These are the documents that lender will use to underwrite the terms of the deal. These could include leases or rental agreements, purchase and sale contracts, title reports, appraisals, zoning approvals, permits, construction drawings,
environmental reports and so on.
A good a rule of thumb is to always overcompensate for your underwriter. Prepare as much support documentation as possible and be ready to turn it over even before the lender requires them.
Hard Money Lending is a fast industry, Hard Money Lenders have dealt with numerous scenarios and they will let you know if the deal makes sense to them as soon as you explain and show these documents to them so be prepared.
Hard Money Lenders are on the lookout for deals day and night if you show any
sign of being a slacker your deals will not get far.
As we mention before experience is key in Hard Money therefore seek professional
help from an experience Hard Money Originator to make sure your numbers, and the needs of the borrower are arranged in a concise, and logical manner in order to get your first deals close.
NUMBER 1 MISTAKE OF HARD MONEY
Here is the number one mistake made by Hard Money Originators when placing
Hard Money Loans.
The best thing you can do in the hard money loan industry is to deal with reality, first put together an application and achieve the highest loan to value ratios with the lowest interest rates and fees, but you must understand that the value of the property and the equity on it is what makes the loan happen.
The Number 1 Hard Money Mistake:
VALUING THE PROPERTY INCORRECTLY
One of the biggest, and most costly, mistakes an investor can make when applying for a hard money loan is not valuing the subject property correctly.
Hard money loans are asset based loans, and are underwritten based on the value of the property.
As an investor you must not only look at resale or the after rehab value of the property, you have to value the property as-is.
Of course the after rehab value is what determines the potential profit once you sell the property, but the as-is value lets you know what the property is worth today, and is the only number the hard money lender will take into consideration.
Rehab projects or any Commercial investment have risks involved and the only way a Hard Money Lender is certain that the borrower will repay the loan is by making sure of the current (as-is) value of the property and that net proceeds the borrower will receive at closing will meet their loan to value requirements.
Hard Money Lenders are not after the borrower’s property, you as a Hard Money Originator must understand that this medium is a great way to get things done fast as great deals come and go your client may not be able to wait for a conventional loan to go through all the time but Hard Money Lenders will always think the worst.
On rehab deals there are too many variables that can go wrong, and most of them are caused by overlooking issues not so obvious to the amateur Hard Money Originator.
For instance, environmental issues are often overlooked in properties that were built before 1965 where oil tanks were placed under houses for oil furnace purposes, the worst case scenario is an investor who purchases the property and forgets to get an environmental report on it, and the tank happens to be liking, between the oil tank removal and the clean up the investor will have to spend between $20,000.00 to $30,000.00 now it’s clear in this case the property has lost value, and is probably worth much less.
Another scenario is that the borrowers might not choose the best contractors ending in the property being in worse condition than when they started.
Experienced Hard Money Lenders base the loan amount the borrower will receive at closing on the as-is, value of the property, and allow the borrower to draw more funds up the maximum loan amount based on the after repair value, as determined by a broker price opinion (BPO) and current appraisal.
DON’T LET THE BANKS AND CREDIT SCORES DICTATE YOUR FINANCIAL FUTURE
Take Action to Protect Yourself. Here are a few tips to keep in mind with regard to credit checks:
Don’t panic. At most, credit checks can account for 10% of the calculation of your credit score.
If you use the information provided here, your credit score shouldn’t suffer significantly because of credit checks.
Be aware and proactive. If you know or have reason to believe that companies are running credit checks on you, try to find out which type of credit check it is and if necessary, look at your credit report to make sure nothing looks fishy. As mentioned in my previous post, you can use www.annualcreditreport.com once a year to check for inconsistencies or errors.
(Pay particular attention to the inquiries section of each report.)
Knowledge is truly power—and money—in this case!
Correct mistakes. You can always call companies to correct blatant mistakes that you find. You’ll probably have to be tenacious, but it’s worth it.
Know the rules. This is especially important for those who are looking into purchasing a new car or house.
Most people rightly look for the best rates on mortgage and auto loans, and fortunately this is only displayed as one credit inquiry – as long as these take place within a contracted period of time, usually about 45 days.
Your data is extremely valuable – to say the least – and a lot of people want to use it in order to make more informed decisions about your likelihood of getting into financial trouble.
That’s why it is important to make sure your information is always accurate, and to make sure that you know the rules about credit inquiries and how they can impact your financial future.
Pay on time, every time. On-time payments—for all your bills, not just credit accounts—are the foundation of a good credit history.
To help make sure you pay on time, you can:
Double-check the due date each month when your credit card billing statement arrives. It’s easy to remember, since your payment is always due on the same date each month.
Consider paying online to avoid delays in the mail. Sign up to have alerts sent to your computer or mobile device to remind you when your payment is due. If you’ve got too many bills due at the same time, ask your credit card company to change your future due dates to a more convenient time of the month. (Be aware that the change can take up to a month to take effect. Borrow enough, but not too much.
If you never borrow at all, lenders have no way of knowing about your repayment habits. But if you borrow too much, you could find yourself in trouble. It’s all about finding the right balance.
A few good rules of thumb to follow are:|
Make a budget, and keep your credit card and other loan payments—not including rent or mortgage—at less than 20 percent of your net monthly income.
Stay within your total credit line, and avoid using the full amount of your available credit.
Maxing out your cards can make it seem like you’re having trouble with repayment.
Manage your available credit. Too much available credit is risky for both you and your lender. Work with your credit card company to keep your total credit line at a level that you can reasonably repay.
Over time, use different types of credit, including credit cards, installment loans or a mortgage.
This shows you can handle different types of financial situations. Though hard money loans can get you money in a hurry and in tough situations, there are some drawbacks.
Considering the cons of a hard money loan may help you avoid a costly mistake. Once you know what to expect, you can avoid the problems associated with ill-advised hard money loans.
Here are a few cons that may open your eyes a little bit to the drawbacks of getting a hard money loan.
First of all, there is the cost associated with the hard money loan. In comparison to a traditional business loan, a hard money loan will be much more costly. You can expect to pay a fair amount more in interest rate in exchange for having the money faster. Consider the higher interest rate as the cost you pay for the convenience.
Additionally, up front fees will add to the cost of the loan overall and it may do so considerably.
This can end up making the loan financially debilitating in the long run.
Secondly, extensions are hard to get on hard money loans. If you get to the end of your interest term and need an extension, you may not get it.
In that case, the entire balance of your loan will be due immediately. If you do not have the money, it gets even worse for you. Most hard money loans will foreclose on your property much faster than a commercial lender. Essentially, if you don’t pay you could be out of your property as fast as the law will allow. Thus, there are considerable risks when taking on a hard money loan.
As a final point, a hard money loan will likely have a prepayment penalty. In other words, paying off the loan early can often cost you as much as 3 months of interest. Even if you don’t think you will pay off early, it is nice to know you can.
With a hard money loan, the option to pay off the loan early without considerable
consequences is just not there in most cases. In the end, the drawbacks linked
with a hard money loan must be fully considered long before you decide to take on the awesome responsibility of such a loan.
Like even the most beautiful woman in the world, hard money is not perfect.
While it seems simple
– an asset secures the loan so everybody’s safe – Arizona hard money is only one option. It is expensive, so things have to work according to plan for profits to materialize. So make sure that your plans are clear and good! Hard money works differently from loans you may have used in the past.
Lenders use more conservative methods to value property than you may expect.
Here’s a few ways to keep things going to plan:
Everyone likes someone knowledgeable about their job, so do a little extra research and then make offers.
Talk to contractors to get a few estimates on what it will cost to refinish and otherwise repair the property. If you head into the private money lenders Arizona office with information on repairs needed, a little history and an estimate of the costs involved, you’ll be that much more likely to get approved.
Also, have an exit strategy. Hard money loans are typically short term and usually are 1-2 years in length. The lender always wants to know that the borrower has a solid plan for either selling or refinancing the property long before the term is up.
Knowing how you plan to repay the loan is a key factor in a hard money lender’s decision. If you are doing this sloppy and not taking care of details, you’re going to look bad in the eyes of everyone and no one wants that.
SOFT MONEY VS HARD MONEY
Hard money and soft money are terms that are used in a number of areas, including in political party funding. Both in political party funding, as in lending to borrowers, the term hard money means that money is lent for a specific set of uses and repayment criteria are applied. Whereas soft money does not have to have a specific use described, in order for it to be offered. If you are entering the world of investments, you will more than likely come across hard money lenders at some point. You will want to know who they are, how you can get access to their finance and whether using a hard moneylender is a good thing.
If you are looking to take out a loan, there are two types of loans you will have available to you.
A soft money loan is a traditional loan given by a bank. A hard money loan, also known as a private money loan, is a similar loan given by a private company. Though both have their advantages, soft money loans encompass traditional loans that have lower rates but are harder to come by.
Soft money loans are simple bank loans. You will need to show good credit and meet a number of requirements to secure this type of loan, especially in a volatile economy.
Ultimately, though, soft money loans have lower interest rates and likely more favorable terms as well though the conditions will be very strict.
Hard money loans are private money loans. Rather than go through a bank, you secure financing through a private lender. Typically, these are used by businesses or investors who were unable to get a soft money loan for a variety of reasons, though
It usually reflects their credit worthiness. In the case of hard money loans, a borrower’s credit worthiness may not be as important. Often, however, a private lender will require property equity as collateral for the loan. Hard money loans also tend to have shorter terms and higher interest rates.
Hard money loans are usually a back up option to soft money loans. Most borrowers will take out hard money loans because they were unable to secure a bank loan or take out a short term hard money loan (also known as a bridge loan) to keep them financed while they secure a long term loan.
It is important to remember that private lenders have very different terms from company to company.
American Life Financial, which serves the Arizona-New Mexico area, is able to provide some of the lowest rates and favorable terms to residents of those two states.
The Limitations of Hard Money Hard money consists of donations to a political campaign used for purposes such as grassroots organizing, advertising and recruiting.
However, a campaign may not use hard money for the purposes of getting elected to Congress or for presidential campaigns. Thus, hard money has limitations as to the type of politician that can use it and on what the politician can use it for. Hard money is, therefore, the more regulated type of campaign contribution.
Soft money contributions do not have the same types of federal regulations and oversight as hard money contributions.
Therefore, soft money does not have the same limitations in terms of where the money goes and how the campaign spends the money. As a result, soft money does not go directly to a political candidate or even a specific campaign. Instead, these donations go to party organizations, where group leaders decide how to spend the money. Technically speaking, soft money can only support state and local elections, and not elections that take place on the national stage.
STATED INCOME MORTGAGE LOANS
Stated lncome mortgage loans are very different than a typical home loan and a very specific type of loan program.
It’s a loan program that doesn’t require borrowers to provide any income documentation or tax returns. While more traditional loan calls for paystubs (or 1099s) and tax returns because the lender wants to be sure you are a safe and responsible borrower.
With a no income verification loan borrowers do need a 25% down payment of (or 25-percent plus equity for a refinance) and an excellent credit history of 700+ since it is a higher risk loan for lenders because there is little documentation.
The U.S. Govt has passed laws that says Fannie Mae and Freddie Mac are not allowed to buy stated income loans, and FHA and VA have never offered them. So, it is hard to find to say the least.
Not many lenders offer this loan anymore, but to accommodate a segment of borrowers with complex tax returns, large down payments, and excellent credit, they are available by select portfolio lenders in high cost areas of the country like New York, New Jersey, California, Hawaii, and Florida.
Stated income loans are ideal for self-employed borrowers who own businesses and receive 1099 commission incomes in New York City, Los Angeles, San Diego, and Honolulu. They need this type of option.
A lot of self-employed individuals learn it is difficult to qualify for conventional loan programs as it can be very challenging to establish a steady income. Nearly all loan programs demand that a borrower submit paycheck stubs, W2 tax forms, bank statements and more.
For a self-employed person, demonstrating a constant annual income can be hard due to the fluctuations in their business income which may be derived from numerous sources.
Because stated income loans usually have a faster closing time than a traditional loan as there is much less documentation there is less time required to verify paperwork so the closing period is much quicker.
If you need a faster closing this might be the option for you.
If you are self-employed and these issues have stopped you from qualifying for a loan then a stated income mortgage may be a good choice for you.
HOW TO BENEFIT FROM A COMMERCIAL WORKOUT
Step 1: Realistically assess your situation.
Impress your lender that you understand your property better than he does. Prepare professional-looking financial statements and current rent roll. Perform a realistic analysis not only of your property but also of the relevant submarket. Get a “broker opinion of value” from a reputable commercial real estate broker.
You may be able to get one at no charge (the broker will expect “inside track” consideration when you’re ready to sell). Be familiar with all material terms in your loan documents.
Step 2: Evaluate claims against lender.
The more bargaining chips you have, the better outcome you’ll be able to secure. Consult an experienced lawyer to determine what, if any,legal claims you may have against your lender.
You may never want or need to assert them, but that information could have a huge impact on your ultimate outcome.
Step 3: Create a realistic workout proposal and business plan.
To paraphrase Jerry Maguire, help your lender help you. Come up with a realistic workout proposal and business plan that your lender can use to take back to committee and go to bat for you.
Consult your CPA to make sure you understand the tax implications of your proposal before presenting it to your lender. Include a hardship letter that fully explains you situation and why you can’t perform without your requested modification.
Step 4: Set yourself up to maximize
your chance of success.Anticipate the biggest objections your lender may have to your proposal and do your best to address those before you meet with the lender. Do you have a weak financial statement? Find a financially strong partner. Does your property suffer from lack of sufficient management expertise?
Identify a new management company with better credentials. Does your property require a cash infusion (for principal pay down, tenant improvements, capital improvements)?
Offer to come up with more dollars or find an equity partner.
Step 5: Negotiate.
But keep your lawyer in the loop every step of the way. One of the biggest mistakes borrowers make is cutting a deal first, then asking the lawyer to review the deal they made. If the lawyer spots an important issue or deal point you missed, it may be too late.
The lender may take the position that you already agreed to all the business points. The stakes in commercial loan workouts are too high not to have your lawyer involved from the beginning of the negotiation.
Many commercial borrowers mistakenly believe attempting a loan workout is a waste of time.
Before you give up hope, consult an experienced professional.
All articles and content is property of hard Money Lenders New Jersey
These are the Hard Money News in New York and New Jersey:
House Flippers Are Back Together With Wall St. What Could Possibly Go Wrong?
By Heather Perlberg
Real estate buyers seeking money to renovate and flip U.S. houses are getting help from some of the world’s biggest investment firms.
Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. Borrowing costs — traditionally the highest in residential lending — are tumbling as the firms compete for customers.
The foray represents a deepening bet on the housing market by Wall Street-backed companies, many of which have built rental-home empires during the past three years and started specialty-lending businesses to finance smaller investors. Big firms with deep pockets and access to cheap capital may have an edge over local private lenders that have dominated flipper financing.
“It’s one of the few highly fragmented businesses left,” said Beth O’Brien, chief executive officer of Colony’s lending business, which started offering the loans last May. “If someone can do it nationally at scale, it’s cheaper and better for the borrower.”
Bridge loans, also known as hard-money or asset-based loans, give flippers cash for home purchases and construction with about a year to repay, and are backed by the real estate. They represent an opportunity of about $30 billion in origination annually, according to LendingHome, an online mortgage marketplace that makes short-term loans and sells them to investment firms such as Colony.
Blackstone, the world’s biggest alternative-asset manager, is seeking to make $1 billion of the loans a year, according to Nick Gould, executive chairman of the firm’s B2R Finance unit. B2R, started in 2013 to lend to landlords, earlier this year acquired Dwell Finance, which provides “fix and flip” funding.
Colony, through its Colony American Finance unit, expects “substantial growth” from the $350 million loans the firm has already closed, O’Brien said.
Home flippers are benefiting from rising prices, limited new construction and a shortage of inventory on the market. While quick resales have decreased from the start of the housing market’s rebound, when investors snapped up discounted distressed homes, profits are getting bigger.
The average gross profit for completed flips in the first quarter was $72,450, up from $61,684 a year earlier and the highest in records dating to 2011, according to a report Thursday from RealtyTrac, a real estate data firm. Markets with the highest average gross return on investment included Baltimore, central Florida and Detroit.
Fix-and-flip investors have generally gotten funding from local private lenders as banks have shown reluctance to extend credit for speculative real estate deals. Borrowers are forced to pay high costs in exchange for the quick cash.
Since big investment firms have entered the industry, rates have already come down significantly and fees charged to borrowers, known as points, have decreased as well, according to Fred Lewis, founder of Dominion Group, a Baltimore-based real estate firm that has been lending to house flippers for about 14 years.
“Rates historically were much higher, typically 15 percent with three to five points,” Lewis said. “In the last few months we’ve seen deals being done at 10 percent and two points.”
The new lenders are focused on more experienced investors, many of whom have have established companies, rather than the amateurs that proliferated during the housing boom a decade ago. Today’s flippers are more sophisticated after the crash weeded out most of the weaker investors, Lewis said.
“These are ideal clients, with the potential to be repeat borrowers across a number of product lines,” said Randy Reiff, chief executive officer of Cerberus’s FirstKey Lending.
FirstKey started offering fix-and-flip loans about six months ago and is just beginning to expand the business. Interest rates generally range from 9 percent to 12 percent for 12-month terms. Borrowers often sell their homes and repay loans earlier, said Reiff, which means it takes a lot of effort to rapidly expand the business.
“It’s resource intensive, and it’s important to have an adequate infrastructure,” he said. “If the regional guys do $50 million of product a year, they could be a major player in their markets. For the larger institutions, that barely moves the needle.”
The hard-money market is getting crowded, which may lead companies to loosen their standards, said Mark Filler, CEO of Jordan Capital Finance, a lender acquired by credit investor Garrison Investment Group about six months ago. His business has more than 300 approved borrowers with credit lines.
“Everybody just jumped in,” said Filler. “The risk is people start to relax underwriting guidelines to chase loans. As this becomes more competitive, there will be more pressure to do that.”
A regional company such as Dominion competes on service when it can’t offer rates as low as Colony or Dwell Finance, Lewis said.
“We’re closer to the ground so we can lend higher loan-to-value and lend it faster,” he said. “If someone calls on Monday, they can be preapproved and funded on Friday. Institutional guys can’t do that.”
Borrowers such as Alex Sifakis, president of Jacksonville, Florida-based JWB Real Estate Capital, are willing to pay more for greater leverage. His firm buys about 40 homes a month and sells half, keeping the rest for rentals.
Dominion gives JWB 90 percent of the home’s purchase price and 100 percent of rehab costs, he said. That compares with 85 percent of both purchases and renovation it gets from lines of credit with institutional lenders, including Genesis Capital, which comes at 9 percent interest rates and two points. Los Angeles-based Oaktree Capital Group LLC invested $100 million in Genesis in January 2014.
“It’s a great thing to have more and cheaper money in the space,” Sifakis said. “It will cause some of these guys charging 14 percent and 4 points to lose a lot of business.”
Blackstone’s B2R is focusing on more established borrowers like Sifakis, to whom they extend loans that look more like lines of credit that average $1 million and go to as high as $100 million, with assets cross-collateralized. Rates are as low as 8 percent and one point. The firm also built a technology platform to make the application process faster.
“This is a sizeable and timely opportunity to institutionalize and consolidate an asset class that’s always been a localized business,” B2R’s Gould said at a real estate conference in Miami last month. “There hasn’t been a national platform that has the capacity to lend to this space.”
FUNDS THROUGH HARD MONEY LENDERS: THE PROS AND CONS AND TIPS TO GET LOAN APPROVAL
Borrowing money from other people has been a common practice done by people for various purposes. In these modern days, borrowing is also a regular thing especially for business purposes and for personal needs as well. When it comes to loans, some of the common sources of borrowed funds are banks, commercial institutions, mortgage companies, and private entities. Private lenders or hard money lenders have become significantly popular these days both positively and negatively.
Understanding Hard Money Loans
Hard money loans are alternative loans usually chosen by borrowers when they are not qualified for standard loans offered by financing institutions like banks. Some also prefer hard money loans if the terms of the loan fit their needs compared to regular loans offered by banks and institutionalized lending companies. Payment terms and conditions are usually higher for hard money loans because these kinds of transactions are considered high-risk compared to standard loans.
Hard money lenders approve loans based on the value of the property or real assets of the borrower without giving large weight to the borrower’s creditworthiness. This lending practice increases the risk on the lender’s part and that is why they impose higher terms to ensure recovery of the money they lent. If you have good asset and you think your financial need is temporary, getting a hard money loan is a good option especially if you need the funds fast.
However, if your financial need is long-term, going for the hard money loan may not be a good option because of higher and riskier loan terms. Hard money loans are great for short-term financing only based on the quick-sale property value.
WHY DO PRIVATE LENDERS IMPOSE HIGHER INTEREST RATES?
Hard money lenders impose higher interest rates because of the higher risk-factor of lending money to a borrower with not-so-good credit record and history. Since most of the borrowers that are opting for hard money loan are those who did not qualify from standard loans, private lenders tend to increase the interest rate to lessen the risk on their part.
The more unsecured the financial condition of the borrower, the higher the interest rate and other terms of the loan can be. However, these terms can also be properly negotiated with the private lender especially if they have good and long business relationship.
BENEFITS AND DRAWBACKS OF HARD MONEY LOANS
Applying loan from hard money lenders definitely has a lot of perks making it a good option for some borrowers especially for real estate investments and projects. Here are some of the great advantages of hard money loans.
Speed: Almost everything about hard money loan is fast. The application and processing are fast and easy. Approval is also fast wherein some private lenders can even approve loans within 24 hours. The duration is also quite short thus the short-term loan. Compared to traditional bank loans with 10 years up to 30 years duration, hard money loans can only range from few months to 5 years maximum.
Wider Collateral Options: Hard money lenders are usually willing to accept different types of collateral as long as borrowers can present good and profitable collateral that can properly secure the loan. Some private lenders can even accept future cash flow of the involved property to secure the loan if they can see great potential from the property. If the property is not enough to secure the loan, they can also accept other assets such us your home or retirement savings. However, make sure that you are going to finish the deal and make profits from the property to avoid losing some of your assets.
Flexibility: Private loans, although come with higher interest rates, may also come with more flexible terms since private lenders are not restricted with the stringent rules and standards followed by institutionalized lending resources such as banks and government institutions.
Less Credit Requirement: Some hard money lenders may still require a decent credit score and record from borrowers but most would still approve loans even if the borrowers have poor credit scores when they see great potential from the property. Compared to the requirements for standard loans, creditworthiness is basically not that a big issue for these kinds of transactions especially if the lender and borrower have good business relationship and history.
Easy Access: Despite the availability of many banks and institutionalized lending companies, most people find private lenders as more accessible compared to these standard loan providers. Private lenders are actually available in almost all states and cities, and they are ready and quick to provide financial assistance if they can also profit from the investment or project.
Hard Money Lenders Better Understand The Business: Private lenders definitely operate in order to earn profits. If you can find good private lenders, you would see that they are willing to provide funds for real estate projects even if the borrower’s creditworthiness is not that good because they can also profit if they help the borrower become successful with the project. Good private lenders do not want to take advantage of the borrower’s financial situation but because both parties can benefit from the project if they help the real estate investors.
Higher Cost: The major downside of hard money loans is that interest rates and upfront fees such as origination fees and points are higher than average compared to those imposed by banks. The higher terms increase the risk on the borrower’s part. Proper management of investments are crucial in order to avoid default and losing of properties and assets due to failed transactions.
Short-Term Duration Only: Private loans are also commonly termed as short-term loans basically because the duration of the loans is shorter ranging from months to 5 years only. This can be an advantage for some but shorter loan duration would mean higher monthly payment to fully repay the borrowed amount plus with the high interest rates, hard money loans can be a big monthly burden if you cannot manage your finances well.
Profitable Properties Only: Although hard money lenders are not that strict when it comes to credit scores and ratings, they can somehow be quite strict when it comes to properties involved. They can be really meticulous and will only approve loans for properties and assets that will surely provide profits since they do not want to get stuck managing properties if borrowers default from the loan. If the property involved is indeed lucrative, borrower can profit and finish the deal, and repay the loan. Both parties will benefit and earn from the deal, a win-win situation.
GETTING YOUR LOAN APPLICATION APPROVED BY YOUR HARD MONEY LENDER
Finding a good loan with reasonable terms is very crucial for the success of your project or to successfully get out from a financial trouble. If you think that hard money loan is the best way to fund your needs, then you should first study and understand the processes, requirements, and techniques needed to have your loan application approved by hard money lenders.
The most important thing to get your loan accepted is to find a potential project or property with great future profits. If you are borrowing money because of financial problem and short-term loan is what you want, then make sure that you have valuable real assets that can be presented as collateral for the loan.
Next is to prepare your repayment and exit strategy. Private lenders would be more willing to lend money if you are able to present a good exit strategy by either refinancing or reselling the property before the end of your loan, or by presenting a good repayment plan.
It would also be an advantage if you prepare the necessary documents needed when applying for a loan so you can easily present them once you found a good hard money lender. Although hard money loan is based on property and real assets, you should still prepare financial information such as your credit record, assets, and income. If you have good records, then it would be more advantageous on your part since aside from having a lucrative property as collateral, you can also show that you have good creditworthiness. However, if you have poor credit record, prepare the documents still so you can readily present them if the hard money lenders request those documents.
Extensive research is definitely important especially regarding the property involved. Real estate investors who have years of experience in the business can easily find properties that have great potential making it easier for them to look for funds like hard money. However, if you are new to the business, make sure that sales, repair, and other important details about the property are prepared.
To have greater chances of getting your loan approved, you should also consider raising your trustworthiness. If you have cash on hand, present them, as well as cross collateral to add value and security to the deal you are offering.
And lastly, know the risks and terms. Hard money lenders will be more willing to lend funds for your investment project if you show them that you know and understand the risk involved, and trusts that your project will profit well in the future ensuring a full repayment of the loan.
Taken from: Loan Funding Co. 8 E Broadway #510, Salt Lake City, Utah 84111
This is a Hard Money Lenders Directory in New York and New Jersey:
Lenders in New Jersey
Aceltis Financial Group
Alpha Funding Solutions, LLC
Asset Based Lending, LLC
West New York, New Jersey
Jersey Shore, NJ
Trenton, New Jersey
Lenders in New York
1st Quick Funding
Valley Stream, New York
AESG Capital, Inc.
New York, NY
New York, New York
A Plus Capital/Real Estate
New York , NY
New York, NY
Brooklyn, New York
BRC Capital Solutions
New York, NY
BRC Capital Solutions
New York, NY
Bronx Hard Money
New York, New York
Cohen Commercial Equity
New York, New York
Continental Finance Corporation
New York, New York
Eternal Key Investments
New York, New York
New York, NY
Fund That Flip, Inc.
New York, New York
FUSION PRIVATE NATIONWIDE LENDING
Gala Resources, LLC
New York, New York
HARD MONEY FUNDING LLP
NEW YORK, NY
Lending Hard Money Nationwide
Queens, New York
Hard Money McKnight
Queens, New York
IKON Capital Ventures
New York, New York
New York, New York
Park Avenue Platinum Group
New York, New York
Poritzky Services, Inc
Ossining, New York
new york, NY
Purple Property Solutions, LLC
Brooklyn, New York
Quality Consolidated Services
Newburgh, New York
New York, New York
Rock East Group, LLC
Elmont, New York
Shadow Tree Capital Management, LLC
White Plains, New York
Strategic Capital Solutions
Great Neck, NY
Thorpe Commercial Capital
New York, NY
West Forest Capital
New York, NY
Garden City, New York