How Important Is Private Lending In Commercial Real Estate?

It was almost ten years ago when the global financial market crashed. Since then, a lot of things appear to have changed. Among those that have been affected the most is commercial real estate (CRE) lending, with loans now coming primarily from private lenders. Every quarter, people the world over continue to feel the effects of the Great Recession, despite it supposedly being behind us. And, as 2017 comes to an end, commercial borrowers continue to have to manage some significant financial complexities. Those include uncertain world affairs, a changing regulatory climate, and higher interest rates. What all of that means is that it remains difficult to secure commercial credit. Today’s lending standards are also tighter than they have ever been.

Well-established borrowers with long track records can still go to their banks and get financing. Regulations have made it more challenging, but if they have sufficient equity and well designed and capitalized projects, there are financing sources for the project.

However, financial investors are resourceful if nothing else. They are now in a unique position, and it is one that sees to have attracted private lenders to the commercial real estate market. The options offered by traditional banks simply aren’t realistic anymore, and this means investors have to look elsewhere. The result is that a range of new institutions have formed as well, including real estate developers, venture funds, insurers, and hard money lenders.

There are some key advantages to taking out a private money loan, not in the least that it provides a lot more room for movement in the CRE market. In addition, borrowers have found that a lot of these lenders are trustworthy and beneficial to them. The result is a significant impact on the CRE market as a whole, and it now looks as if private money is filling the gap left behind by the financial crash of 10 years ago.

How Is Private Money Helping?

It is quite obvious that there has been a significant increase in the number of private lenders that are becoming involved in the CRE market, and the existing statistics show this, too.

The silver lining for U.S. commercial properties came from the comparative strength of the U.S. economy and higher yields of U.S. assets. With global economies having slowed down in 2016, U.S. property markets remained a favorite destination for cross-border investors. While top-tier markets in gateway cities continued as major targets of investor activity, the higher yields and advancing economies of secondary and tertiary markets offered viable alternatives to investors looking for stronger returns.

That being said, it is very important to understand the impact of this on overall market activity. As such, the first key issue that is obvious, is that CRE investors and CRE developers continue to be heavily involved in the overall real estate market. However, they no longer have as much access to traditional lenders as they did in the past. This is due to traditional lenders choosing to be more cautious and also by new regulations, such as the Dodd-Frank Act.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008. The act established a number of new government agencies tasked with overseeing various components of the act and by extension various aspects of the banking system.

Of course, the Dodd-Frank Act is now in question again, as President Donald Trump has, so far unsuccessfully, attempted to repeal it in its entirety, to be replaced with the Financial CHOICE Act.

If we want strong economic growth and more freedom, we must empower Americans, not Washington bureaucrats.

However, much of the Dodd-Frank Act will stay in place and while the Financial CHOICE Act will be implemented, the reality is that investors will have to continue to look towards alternative lenders if they want to fund their CRE investment projects.

The Potential Pros and Cons of Private Lending in CRE

Lending always comes with risks. However, with private lenders, there is a different systemic risk associated with it. This was, in fact, a key lesson learned from the 2008 crash. Large lending organizations were classed as “too big to fail”, and this caused the Big Bank Bailout.

The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out. Yes, it was trillions not billions and the banks are now larger and still too big to fail.

Private capital, if there is another burst of the real estate bubble, can quite easily absorb this. Only two players will be affected: the private lender and the investor. This is very different from an entire bank going under.

Yet, at the same time, there are some negative issues as well, one of those being that a lot of private investors are foreign investors. In fact, many of them come from China, as well as Canada and Europe. Clearly, the US market is seen as a safe market, but there will come a time when these investors start to see their own domestic market as safe again. This could have a significant impact on real estate investment trusts (REITs) further down the line, and the overall impact this could have on the market itself would be significant, albeit in theory.

What’s in Store for Private Money Lenders?

To date, the fact that the economy has strengthened has not resulted in more commercial credit becoming available from traditional lending sources. Hence, it is feasible that the last quarter of this year could see some real changes to what the lending environment looks like. There continue to be significant changes in financial regulations, and it is now also seen that interest rates are finally rising again. This means that, perhaps, traditional lenders will become friendlier to investors once again. Whatever happens, however, it is vital that the lessons learned from the financial crash and the benefits offered through private money since then continue to be at the foreground of their work.

The Difference Between Hard Money Lenders And Traditional Mortgage Brokers

Technically, a hard money lender is a type of mortgage lender but they are very different from standard banks. Generally speaking, hard money lenders are private individuals, which means their systems are somewhat different to that of regular banks and brokers. It is important to be aware of the differences if you are a real estate investor, because you may find yourself having to use a hard money lender. Continue reading “The Difference Between Hard Money Lenders And Traditional Mortgage Brokers”

The Pros And Cons Of Taking Out A Hard Money Loan

Hard money lending is quite a unique form of lending. It is generally used for real estate transactions, but goes outside of traditional mortgages and other such lenders. Usually, the money is provided by investors, which can be individuals or groups, who are looking at the feasibility of providing short term loans with relatively higher interest rates. If a traditional lender denies someone a loan, or if someone needs money fast, then hard money may be the best option out there.

Understanding Hard Money Loans

No matter what type of loan you take out, the lender will want to have proof that shows you can afford it. Generally, this means looking at your income and credit score. If you have a good history that shows you have repaid your debt, and you have a good debt to income ratio, then most lenders will approve you. However, determining this is a long and slow process, even if you have a fantastic income and perfect credit score. On the other hand, if you have a few negative marks, or a complex form of income, then things take even longer and you may even get declined.

A hard money lender looks at things differently. What matters to them is your collateral, which they will secure the loan against. This means that your repayment ability is a lot less important. Should you find yourself in financial difficulties, the lender will simply take your collateral and sell it on. Hence, it is the value of this collateral that is the determining factor, not your personal financial situation.

A loan of “last resort” or a short-term bridge loan. Hard money loans are backed by the value of the property, not by the credit worthiness of the borrower. Since the property itself is used as the only protection against default by the borrower, hard money loans have lower loan-to-value (LTV) ratios than traditional loans.

In most cases, a hard money loan is a short term loan, lasting no more than five years. They have very high interest rates, which is why most people wouldn’t want to have the loan for longer than absolutely necessary anyway.

Why Should You Consider a Hard Money Loan

A hard money loan is very costly, and that is its greatest disadvantage. However, there are a number of situations in which it can be very beneficial.

Hard money loans are right for both short-term investors and long-term investors. Specifically, hard money loans are used by Fix-and-Flippers, Buy-and-Hold Investors, and Portfolio Investors.

There are a number of key reasons as to why these types of investors would look to hard lending:

  1. Speed – Because the focus is on collateral rather than financial positions, a loan can be approved and closed very rapidly. Naturally, these lenders don’t want to repossess your property, but they have a lot less risk as they don’t have to verify your income. You build a relationship with a lender and the process is then incredibly quick.
  2. Flexibility – Hard money loans don’t go through regular underwriting processes, evaluating individuals instead. You have the possibility to change your methods of repayment, not in the least because you are likely to work with an individual, rather than a huge national bank that has stringent policies.
  3. Approval – Since these types of loans are secured against a piece of property, you can generally borrow as much as the value of your property. Negative pointers on your credit report, such as past foreclosures, are much less important. While lenders will usually view your credit, they won’t generally base their decision on that.
  4. Low LTV (Loan-to-Value) ratios. Usually, you can get an LTV of between 50% and 70%. While this means that you do need some assets, the ratio is much lower than what it would be on an investment property with a traditional lender. Again, this is because the lenders know they can get their investment back quite easily should you not pay back.

When Should You Consider a Hard Money Loan?

A hard money loan should only be taken out for short term loans because of their high interest rates, as stated. This is why they are so popular with fix and flip properties.

Hard money lenders will charge 2-5 points and 12-18 percent interest, although some hard money lenders will allow a smaller down payment and finance some repairs. The catch is hard money lenders like to work with experienced flippers and usually only offer their best loans to repeat customers.

With fix and flip investments, a property is purchased, fixed, and sold within no more than a year in most cases. The goal is simply to purchase a property and sell it for a profit in as short a time as possible. If the property isn’t sold, and investors decide to live there while waiting for the value to increase, they will generally look at a refinance option so as to get better value.

The Disadvantages of Hard Money Loans

While the hard money loan has some key benefits, it has some drawbacks as well. The biggest is that it is a very expensive form of lending, which means lenders must anticipate significant profits if they want to end up with profit. Furthermore, the way that properties are valued is also often different from traditional lenders.

The interest rates on hard money loans are incredibly high. This is why these loans should be considered if you are sure that you won’t be accepted anywhere else. There are numerous loans available for people with poor credit or complex income scenarios, and you may want to consider those first, even if they take longer to close. An FHA 203k loan could be an option, for instance.

An FHA 203k loan is a loan backed by the federal government and given to buyers who want to buy a damaged or older home and do repairs on it.

How to Find a Hard Money Loan

In order to be accepted for a hard money loan, you have to find an investor. This means you have to research who offers this type of money in your local area. Real estate investor groups and real estate agents are usually a good place to get those important connections. Make sure you speak to a number of different lenders before you decide to sign up.

Choosing a Commercial Hard Money Lender

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Looking for a commercial hard money lender may seem to be tough. But by reading a couple of tips on how to choose one, you’ll be able to find this step to be a breeze. It’s important that you don’t take this step of getting a hard money commercial loan for granted. Not because there are several lenders out there, you ignore the process of selecting one. You may think that the other steps of the lending process are much harder. Though those other steps may be more complex, choosing a lender is as important. Remember that you will be dealing with that one throughout the whole hard money lending process. So it’s important that you choose the right commercial hard money lender.

If you are planning to venture in the world of real estate, specifically investing in a couple of real estate properties, it is important to know the best commercial hard money lender for you. Note that you will be working with your lender throughout this venture. Remember that your lender can be like your best friend in this business venture. Thus, you must know how to choose one properly. Below are some tips on what to look for hard money commercial lenders.

One quality that all these lenders share is their wealth. They are rich. How can you believe and go with a lender that doesn’t seem to be like one. In a nutshell, these people or groups have readily available money in a large sum that can easily be disposed. They can lend people in need of investment money at any given time. In short, they have a lot of liquid assets. Thus, you should observe them, their offices, and their belongings or assets to check if they are really well-off. You can’t seriously believe one to be successful in lending if they seem unsuccessful themselves. These types of lenders usually work at the safety and comforts of their homes with their private office. They choose to be discreet because of the money that they manage on a day to day basis. Thus, they are also called private lenders.

Aside from being filthy rich, a commercial hard money lender also acts fast. Unlike banks that process loans for at least a month, these lenders can grant you your loan much faster. Once you have convinced the lender, it’s easier to get the finances you need. Who knows when another investor snatches that fixer upper home you’re looking at? Last but not the least go for a lender who cares about the business venture you’re getting yourself into. They will surely check out that property to ensure that it is worth the investment.

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Using a Hardmoney Lender To Reach Business Goals

There have been many business owners and individuals who have been down on their luck, have poor credit and needed a loan. They fortunately relied on a hardmoney lender to get their application approved. These loan professionals specialize in approving sizeable hard money loans for the disadvantaged after the banks didn’t honor their request. This makes a hardmoney lender attractive to professionals and new entrepreneurs who need working capital or funding.

Lenders have a different approach from the average banks in their loan review process making them a lucrative source for securing loans. Larger loan applications ranging in the upper hundred thousand’s to millions are evaluated. Many loans are approved for 60-65% of the fair market appraisal value of the collateral.

Getting acquainted with the uniqueness of a hardmoney loan and how the process works may help to address your financial needs, dreams, and goals. The qualification guidelines established are fairly lenient. When the loan application is evaluated your credit history in many cases will not weigh the outcome of the decision. The brightness of your future and your proven ability to pay going forward is one of the determining factors for qualifying.

A hardmoney lender is a source for getting large loans for businesses and higher net worth individuals that fall into the non-conforming loan category. Businesses that had rejected loan applications with banks have found success in gaining funds when going this route.

If you can demonstrate in black and white that your financial future or venture is promising, that you can meet the terms of the hardmoney loan, and the proposal makes good business sense, then the likelihood for approval increases.This simple application process is very beneficial to people who have no other means to get the money that they need.

The loans in many cases can be used for business expansion, builders who are launching developments, construction loans, sizeable real estate transactions, and a host of other ventures requiring large loans. A hardmoney loan could be funded by innovative commercial lenders, private companies, or even private investors.

Upon submitting an application, you most likely will receive an acknowledgment to your request within 48 hours. The time frame for closing varies between 14 and 30 days. The ability to fulfill your goals and dreams is possible when using a hardmoney lender who can turn a gloomy situation into a winning one.

The Inner Workings of Hardmoney Loans

Real estate loans are plentiful to some and come in many different types. Real estate investors prefer using something called hardmoney loans. The reason real estate investors prefer the hardmoney loans are that they allow them the opportunity to buy a property quickly and fix it up for flipping. There are both good points and the negative side to these types of loans.

Part of the application process for obtaining hard money funding is to provide something called a ‘Scope of Work’. This is a worksheet that provides details about every kind of repair that the investor is planning to make on the property to rehab it for resale. This is a gauge that the hard money lender will use against the property in question. If any repairs are done to the property that is not listed on the worksheet, reimbursement may be difficult to get from the lender. The purpose of the worksheet is to be sure that both the lender and the borrower are seeing ‘eye to eye’ on what the project will encompass. There is usually some leeway allowed by lenders during the process of the rehab when unforeseen things come up.

Investors usually require at least twenty percent as a down payment on hardmoney loans. Most lenders will also want to see that the borrower has reserve money sitting somewhere in a bank account. The monthly income that the investor makes is a big consideration for the approval of the loan. The credit rating of the borrower has little influence in the consideration of loan approval but other factors about the cash on hand and the property potential is far more important to the lender. Each lender will have their own specific requirements for issuing funding but most will be more concerned with loan to value.

The repairs that the investor plans to make on an investment property will be estimates. There are always many variables when the actual work begins which is just the way it is in the ‘real world’. For this reason it is usually a good idea to submit an estimate that is higher than you think the repair will really cost. This way you have a better chance of not running into a situation where you need to ask for extra funds. If there is extra money left, then you can return it to the lender or keep it as a reserve but it is not something that should be spent for any other purposes. Hardmoney loans are only to be used for the purpose of buying and repairing the property as listed in the loan agreement.

Hard Money Commercial Loans Deliver Fast Options

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Businesses that are in urgent need of a loan for commercial purposes have discovered a good source in getting what they need through hard money commercial loans. They serve as a means to getting favorable and much faster results to satisfying financial needs without added stress, headaches, and denials that sometimes come with getting a bank loan. Consulting with hard money commercial lenders and investors who specialize in hard money commercial loans find ways to make deals happen.

The benefit to doing business with commercial hard money lenders is they will look at all applications that fall into the non-conforming category that the banks immediately turn down without your input or your plan for development and growth.

Lenders who review and approve hard money commercial loans welcome your application with open arms. There are many businesses that need funding without having to go through a lot of red tape and the extensive scrutinizing that comes along with it. They have come to appreciate the consideration and approval they are extended.

When dealing with these lenders, you will be working with private companies, private investment firms, and high end, high profile investors. They have the expertise and the knowledge to recognize a good deal when they see one.

There are different reasons to use hard money commercial lenders. They can assist businesses in a variety of industries. Some loan applications are submitted for new ventures, like commercial real estate developments. Many loans are used for major start ups of a corporation who have excellent products and services, and a good financial road map to deliver profits. This is a core part of your presentation that will show lenders you are on the right path of growing a company and will be able to meet the agreed upon loan payments.

Another avenue that hard money commercial lenders may offer is known as a bridge loan. This type of loan can help you short term if you only need capital to continue operating for a designated period of time until you come into your own money. An example would be if you are selling land and you need extra funding to keep the property afloat until it is sold and you realize your profits from the sell.

Some lenders may have a stipulation that involves you selling the property to them and lease it in return until it is sold. Most hard money commercial loans offer smoother transactions and are a good means to accomplish your needed financial request for assistance.

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Hard Money Direct Increases Your Financial Power

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When you need a quick loan for a sizeable buy and you don’t have the resources or the time to get a bank loan, dealing with a hard money direct lender may be the answer for you. There are a variety of companies made up of investors that specialize in hard money financing. Working with a hard money direct lender will cut through much of the woes of securing a loan.

These lenders specialize in approving loans for a variety of good reasons including hardship cases. Whether you need to expedite a large real estate deal, are purchasing commercial property, or looking to expand your business, you may be in a good position to secure hard money financing.

Most businesses and individuals who have non-conforming loan requests typically experience a denied loan application from banks and financial institutions. When this happens to you, understand that you have a variety of sources to use who are ready to accommodate your loan request.

These opportunities are exactly what hard money direct lenders are looking for. Every borrower is evaluated on their own individual situation. If the deal you are presenting is a good one, the lender will be creative in the solutions they offer you.

By working with a direct lender, you are giving yourself an advantage. This means in many cases that you are dealing exclusively with the key decision maker. The benefit to this is you will get answer, results, and the hard money financing that you require much faster.

This is the attractiveness of hard money loans. The paperwork is streamlined, the process is smoother, allowing you to close your deals or fulfill your financial goals with speed. That is why this is a rewarding option for both the borrower and the lender. As long as your need for the loan makes great business sense and you can demonstrate you have an effective action plan for paying the debt back, it strengthens your chance for getting approved.

You can generally expect an LTV (loan to value) between 50% and 65%. This depends on the type of loan and what category your need falls within. Lenders provide hard money financing for construction projects, commercial ventures, rehabilitation of property, and real estate. They also entertain bridge loans offering money as an interim measure until you are on your feet or attain expected proceeds, income, or yields. A hard money direct lender can prevent you from putting your plans on the backburner and help you move forward victoriously.

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Working With Hardmoney Lenders

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If you want to be a real estate investor today there is an advantage to having a good relationship with hardmoney lenders. Especially in today’s market great deals come up quickly and to be able to take advantage of a good deal when it becomes available you will need a good source for available funds. Bank loans are very strict today and it may not be possible to get quick financing from conventional financing. Hardmoney lenders are available to provide financing to the real estate investor when they need financial assistance to take advantage of opportunities that come up quickly.

Private money lenders offer loans that are considered non-traditional and are called hard money personal loans. For the real estate investor, working with hardmoney lenders who offer a hard money rehab loan means that both parties will make money from the properties that they find. The lender will base the loan application on the potential of the property after it is repaired. Their criteria is asset based and when the real estate investor finds a property that they can rehab and turn a quick profit the hard money mortgage loans will give them the opportunity to take advantage of the property to make a quick profit.

Another advantage that the hard money mortgage loan holds for the real estate investor is that credit checks are not required being that the criteria for the loan in based on the rehab value of the property. If the investor has less than perfect credit it is still possible to get a loan from the lender. It is also not necessary for the borrower to fill out piles of paperwork, produce endless credentials or any other types of financial proof of stability. The property speaks for itself.

Hardmoney lenders are much easier to deal with than conventional lenders or bank officers. After flipping a couple properties it is possible to build a good working relationship with the lenders making the funding even easier. The private lender is just that and there is no necessity to deal with a panel of loan processors or a loan team just to obtain a simple mortgage. The loan offer comes quickly and makes all the difference when the real estate investor is trying to take advantage of a great deal that comes along. Instead of waiting weeks for an application approval it will only take days. If you are looking for a private lender your fellow investors will probably know a couple good private lenders who will be willing to work with you.

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Hard Money Residential Lenders On The Rise

Hard money residential lenders are on the rise, the old game in the real estate business is making a grand resurgence on the real estate scene. With thousands of people at risk of losing their homes in today’s economy and loan scandals, the hard money lender is making a real come back. This is part due to the waning economy, part due to poor lending practices, and part due to a mortgage restructure plan that is not going so well. The combination of these factors has left a wide open playing field for the hard money residential lenders.

There are thousands of mortgages in the U.S. today that are in default or in foreclosure. This is a real predicament for the homeowners who took out adjustable rate loans 4-5 years ago and now are saddled with a payment that they cannot keep up with. The government stepped up and initiated a giant mortgage restructuring plan to help, but the lenders do not seem to be so wild about this idea. The guidelines around the restructures are too strict to help many of the homeowners that are in a bad spot today. Given those factors, the hard money residential lenders are preparing for their hay day.

The hard money lenders are there by the groves to help these homeowners save their homes, as long as the borrower can meet the criteria that they require. The hard money loan criteria are a little different than that of a conventional loan. It is based more on the value of the property than the owner’s ability to pay. That is a good thing considering that many of these homeowners have a damaged credit score thanks to late pays on the mortgage and soaring credit card interest rates. The hard part of the qualifying for a hard money loan is the value of the home, as on top of everything else, the value of real estate has dropped.

As long as the borrower has more than 30% equity in the home, there is a good chance that he may be able to save the property from bank foreclosure or short sale. Granted, the borrower will now pay more interest and the loan will be expensive to procure, but he will get to keep his home if he can continue to make the new payments on time. There is both good news and bad news here but for both the homeowner and the hard money residential lenders, there is at least hope.