Archive for

Commercial Hard Money Loans and the Short Sale

The Essence of the commercial real estate hard money loan (HML) is based on the fact that they are short term loans for real estate investors to purchase and or rehab investment property that has substantial real equity. Commercial Real Estate Investors can make lots of money investing in properties using a hard money loan. For traditional financing the value of the property is the lesser of the purchase price or the appraised value. This definition does not account for distressed property which may be sold below market value and thus has real equity when compared to similar properties. This definition works for traditional lending as the best definition of value. It is impossible to determine future value of property that may not be in good condition or may have other appraisal value issues that may stop the property from being sold on the to a traditional consumer instead of an investor. There are greater risks inherent in a property that needs to be renovated and does not meet its highest or best use.

Invest with Hard Money Loans

The HML or bridge loans are only made to real estate investors on commercial and residential properties that will only be used by the investor as an investment (not owner occupied) property. This is to keep in line with the laws of usury and predatory lending. To charge higher fees and interest rates to consumers is illegal. Real Estate Investing is a business. Businesses are should know enough to determine the risk and reward of an investment and therefore have no “consumer protection” like predatory lending. Business owners can determine which course of financing they would pursue and if the cost are justified by the potential reward. I would never finance my home or suggest anyone to do so using a HML. There are situations I would invest in a short sale property that I can purchase at 30% to 50% below the true market value even if it costs me 10% in fees and double the normal interest rate. So even assuming this adds 15% to the costs I would still be way ahead when I refinance or sell the property.

Lending Institutions

Many financial institutions are willing to accept less than what is owed them on the sale of properties they have lent money on to avoid having another none preforming asset being added to their books. Non performing assets mean that a bank will be judged by federal regulators as making bad loans. This puts them at risks of takeover or just reduces their rating as a prudent bank. Banks are not in the real estate management or RE sales business. Therefore, there is a limit to the number of RE properties they can own or manage. All these are reasons to accept less (accept a short sale) versus accept nothing and carry another none performing asset on the balance sheet. This is neither good to regulators or shareholders as it drives the value of the financial institution down.

Another reason banks accept short sales is that if they have to foreclose on a property that adds maintenance, Realtor and legal costs while the market value of a property reduces greatly when the occupant is evicted and the building sits vacant. So who can say the reduced amount the bank accepts as a short sale would not ultimately be more than they may have otherwise gotten off of a deal via foreclosure and the vacancy of a property.

Commercial Bridge Loans and The Short Sale.

These reasons the door for investors to purchase commercial real estate below market value employing the short sale and use hard money loans to finance these deals is wide open. The real estate investors will have the benefit of putting little or no money down and even get funds to rehabilitate the building to make them more saleable or qualify for conventional refinancing once stabilized. To properly employ creative financing, hard money lenders and other strategies to purchase commercial investment properties seek the advice of competent, experienced and creative lenders with integrity.

The Difference Between Hard Money Loans and Private Money Loans

To survive in today’s tough economy, business owners and real estate investors often turn to non-traditional lenders to secure financing for operating expenses or property purchases. Non-traditional lenders have emerged as an excellent option for many because they offer loans with fewer restrictions and more generous lending terms than traditional lending institutions such as bank and mortgage brokers. However, many investors and business owners find themselves confused by the difference between hard money and private money lenders.

What’s the Difference Between Hard Money and Private Money?

Both kinds of money loans provide timely financing for investors and business owners with a wide variety of financing needs. However, there are important differences between these two types of loans. Understanding how these types of loans differ is key to picking the financial product that will best meet your needs.

Basics of Hard Money Lending

Hard money loans are offered by businesses that specialize in alternative lending. While the funding for these kinds of loans often comes from private sources, the lenders are regulated and specialize in working with real estate investors, private borrowers and business owners. Like private money lenders, hard money lenders focus on borrower equity instead of credit scores to make lending decisions.
However, hard money lenders generally have set approval criteria and loan terms. They work with borrowers who can’t find financing elsewhere, but they don’t negotiate extensively about how loans will be repaid. Instead, they rely upon industry-standard formulas to determine interest rates and repayment plans that allow profit while also providing fair terms for borrowers.

Basics of Private Money Lending

As their name suggests, private money loans are offered by completely private lenders. They generally do not operate as businesses and often do not advertise that they have funds available to be lent. Most private money lenders are also unregulated and don’t have to conform to lending industry regulations regarding loan rates or terms.

Approval criteria for loans can also vary widely between private money lenders. Because there are no set, standardized criteria, borrowers often have little idea whether or not they’ll be able to access private money funds. Securing these types of loans tends to require heavy negotiation regarding interest rates and repayment plans.

Should You Choose Hard Money or Private Money Loans?

Choosing between the two may be difficult, but many borrowers find that hard money loans are much more beneficial because they are offered by regulated businesses. Borrowers can review the criteria of individual lenders before turning in their applications so that they have a decent idea of whether or not they’ll be approved for financing. These loans also offer fair, industry-standard terms that benefit borrowers.
Remember that there are different types of hard money loans available:

  • Gap loans help business owners meet deficiencies between their available funds and business expenses.
  • Fix-and-flip loans help borrowers who want to buy distressed properties to rehab them and sell them at a profit.
  • Commercial rehab loans help those who want to buy and repair distressed commercial properties.