Privately funded, often called "hard money" commercial mortgage loans typically carry annual interest rates of more than 10% and charge origination points of 2%-4%. These kinds of rates and terms may seem restrictive, but when the situation calls for it, taking advantage of private lending is a smart business move.
When Time is of the Essence
In the commercial real estate game time truly is money. Experienced property owners, investors and developers will tell you that often speed of execution can trump interest rates and points. When facing a looming purchase option expatriation date, a pending balloon payment that's coming due fast, an unexpected cost overrun or, worse, a foreclosure scenario business people don't have time to wait the 60-90 days it can take to close a conventional bank loan. Unfortunately, there are times when your property or you project are on the line and nothing short of quick cash can solve your problem. Hard money lenders can make on-the-spot decisions and can close fast. One week funding is very possible and any legitimate private lender can close almost any deal in less than 3 weeks. Hard money is relatively expensive but it's a heck-of-a-lot less expensive than losing your deal.
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When You Have Credit or Documentation Issues
Conventional lenders will insist on large amounts of documentation and that the borrower(s) have decent credit. To start with, real estate investors must produce 3 years tax records, profit and loss statements, copies of leases, bank statements, building maintenance records and much more. Details will be verified and a deal can be killed because of an "I" that was not dotted or a "T" that was not crossed. Private loans, on-the-other-hand, are usually equity based and not driven by the strength of the borrower. Your credit may not matter at all. Hard money lenders do not have the bureaucracy and the regulations that banks, Wall Street and the insurance companies do. They routinely do deals with minimal documentation, sometimes without even a property appraisal. If your record keeping is in disarray, if you are missing required documents, if you have poor credit or you simply don't wish to share so much personal financial information, then hard money may be your best (and only) option.
When You Need a Bridge
Private lenders are among the most efficient and professional bridge lenders in the financial services industry. When a commercial property owner or developer finds themselves in need of a bridge loan (short term, interim financing) they are well served turning to private funding sources. Very often bridge loans are used to "bridge" the time gap that can exist between their permanent financing coming on line and their immediate need for cash, such as when they have a closing in days but their bank can't close their loan for weeks. Bridge loans are also an important method of dealing with construction cost overruns, when a few million dollars can get the project finished and ready for sell-out quickly. There are many situations that call for bridge financing and many private lenders exist for the sole purpose of providing it quickly.
When You Need To Make an Attractive Offer
Cash is still king and having a reliable hard money lender on your team is like money in the bank. If you tell a seller you can close on a prize piece of property in 10 days with all cash, you will get that sellers attention. Your competition is likely asking for a 30 day due diligence period and as-much-as 60 days to close. If you can establish credibility with a dependable private lender and you know what their loan criterion is, you can bid with confidence and the cash to back it up.
There is no denying that private loans are more expensive than conventional loans but consider that they are usually short term and can often make the difference between a deal closing and a deal falling through. A successful commercial development project or a profitable income producing building can make an investor millions over its life cycle. When all factors are considered, and your deal is on the line, hard money can be down-right cheap.
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