Commercial Hard Money Mortgage

Commercial real estate loans often enter a gray zone between traditional bank funding and the much higher rates of private money. This is the right time for to find a ‘hard money lender’. Although these lenders charge considerably more than bank rates, usually between 11% and 16%, they are a substantially less expensive and demanding option than private money or investor-funding, which can cost from 15-20% or more with fees. Hard money lenders are primarily making bridge loans ­ designed to be short term, these loans only last from 6-24 months to help you ‘bridge’ the gap between the time the money is needed and a time when traditional, less expensive bank financing can be obtained.

 

The reasons you might need hard money are many, but common factors often include time, credit history or the type of project. In a time-critical situation, the 1-3 months of bank diligence required to fund may cost you the entire project. Hard money funding can deliver in 2 weeks if necessary, making it a very attractive option for those in desperate need.

 

With a bad credit history or even an imperfect score, banks may drag their feet or be completely unwilling to fund a large deal. Hard money is the opposite ­ while credit score can help a deal along, hard money lenders are most interested in whether the deal ‘makes sense’ and whether you will be able to pay the loan. A poor credit score often accompanies a hard money borrower and is a big part of why hard money lenders get business ­so don’t let it dissuade you.

 

Lastly, certain types of projects may not be eligible for bank financing ­ these can include certain commercial properties and types of businesses or operations, the land the property is on or the incompleteness or damage to a property. Hard money is designed to solve all of these quandaries and can fund a much broader range of properties and projects than bank financing.

 

The structure of a hard money loan is generally short-term. You should anticipate paying off the loan in as little as six months to a maximum of 5 years. Hard money is not a traditional mortgage, and with the interest rates being 1.5-2X bank rates, it is far more advantageous to view hard money as a short-term solution. This is why hard money is also called a ‘bridge loan’.

 

The process of obtaining a bridge loan is very simple if you are prepared. You must first obtain a written appraisal of the property by an experienced commercial appraiser ­ don’t rely on bank numbers or estimates, an up-front appraisal will save you valuable time & money later on. Second, you should find several hard money lenders ­ the Internet is a great resource for finding direct lenders (although you should carefully research and ‘ask around’ before selecting one, as the industry does have its ‘seedy’ players). Another option is to use a broker, who will already be familiar with many hard money sources. Be careful though, while a broker’s services are valuable and save time, you should be prepared to pay a commission of 1-3% for their efforts. Last, you’ll need to submit your loan package with paperwork, photos of the property, the written appraisal and your plan for the money.

 

The lender will review your loan package and will be able to tell you immediately if the deal meets their criteria. They will then issue a ‘terms sheet’ specifying that everything in your loan package is true and they find no problems, they will fund your deal at a specific rate. At this point, you will need to send the lender the up-front due diligence fee to cover their expenses. They will fly out to the property, inspect it themselves and may meet with you directly to discuss your plans for the money. When they return to the office, you should anticipate funding within 7 days.

 

While hard money is not the solution for every project, it is a valuable alternative when bank financing falls through. The rates, speed & flexibility of hard money can be very attractive to commercial real estate investors, owners & managers.