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How Does Commercial Hard Money Work?
A hard money loan is a real estate mortgage collateralized against the
true as is value of the property for which the loan is made. Most
lenders would prefer to usually fund in the first lien position,
meaning that there is no senior mortgage holder. Many lenders will
subordinate to another first lien position loan; this loan is known as
a mezzanine loan or second lien. These are harder and at times more
Most lenders structure their loans based on a percentage of the
quick-sale value of the subject property. This is called the
loan-to-value or LTV ratio and typically hovers between 50-75% of the
market value of the property. This changes with the economy, strength
of the deal and borrower. The LTV can also go much higher if you have
other properties to cross collateralize or other assets the lender may
see as desirable. We have seen instances of a large wine collection,
art and coins to name a few. How to determine you LTV. Determining your
LTV, the word 'value' is defined as 'today's purchase price.' This is
the amount a lender could reasonably expect to realize from the sale of
the property in the event that the loan defaults and the property must
be sold in a one- to three-month time frame. This value differs from a
market value appraisal, which assumes an arms-length transaction in
which neither buyer nor seller is acting under duress.
Commercial Hard Money Loan Program Definitions:
Hard Money Bridge Loans
A bridge loan is a short-term loan which bridges the Borrowers plan
from one point to another. The bridge loan is useful when a Borrower
only needs financing for a short time frame where a long-term fixed
rate loan does not make sense. A hard money bridge loan can be used by
a real estate developer, or other business entity to take advantage of
commercial opportunities that don't fit into the traditional bank
standards. The typical maximum loan-to-value allowed on subject
properties is 75%. Additionally, Borrowers are required to have a
minimum of 10% cash or equity invested in a project when applying for a
bridge loan; this is known as 'skin in the game'.
Mezzanine Loans (and how they differ from bridge loans)
A mezzanine loan can be a type of bridge loan in the sense that it is
short-term and not permanent financing. However a mezzanine loan is not
secured by property, it is secured by an ownership interest in the
company that owns the property. This occurs when the Borrower needs
more money than he is able to borrow against the property, so he puts
up an interest in his company as collateral.
End of Construction Pay Off Loans
If a developer has a construction project that is at least 75%
completed, they can obtain a hard money loan to pay off the
construction lender and complete the project. A hard money loan can
also be used to bridge the gap between a completed project and standard
financing from a bank or traditional lender. With an End of
Construction Pay Off Loan, A developer can use the collateral of the
current project to raise capital for the next project.
Foreclosure Bailouts (Foreclosure Prevention)
A hard money loan can be used to prevent foreclosure on a commercial
property. A pending foreclosure can be stopped, if a property can be
collateralized for up to 65% of its loan to value, based on the quick
sale value of the property.
A hard money loan can be used to purchase real estate if a borrower
does not meet conventional bank standards or does not have time to wait
for a traditional banks typically slow lending process. Hard money
allows for things that banks never allow: low or no credit scores,
incomplete construction, property in need of repairs, etc. Hard money
funding can be used to quickly work around these financing problems and
provides the opportunity for a savvy investor to acquire new properties.
Commercial cash out refinances allow you to extract equity from real
estate you already own. It can be a quick way of generating additional
working capital to be utilized as you see fit. These loans are based
more upon the building than the borrower. They can be quite creative
using not only the property but UCC filings on equipment and inventory.
Once all required paperwork has been submitted these hard money loans
will fund as quickly as one week.
Commercial Mortgage Loans
This kind of hard money loan is for foreign investors who want to
purchase commercial real estate in the United States. All sorts of
property can be considered for hard money funding, including;
commercial, industrial, residential, hospitality, rehabs, etc. Few
restrictions exist for countries with notable exceptions being
Borrowers from countries the Unites States Government is currently
having problems with.
Rehab Hard Money Loans
A commercial rehab/investor can use a hard money loan for short term
financing. Once a property has been renovated and sold for a profit,
the funds are repaid and we can often allow the borrower to use the
funds again on the next project. The average closing time for an
approved loan is just two weeks!
Land Hard Money Loans
Land loans are some of the hardest loans to acquire. They are hard to
value depending on their location and come with the greatest amount of
risk to the lender. They typically do not exceed 30%-50% LTV.