Hard Money Commercial Lending: Current Market
Commercial hard money lenders are still lending in the post-Recession-era, but there are now more types of hard (aka private) money loans with varying degrees of documentation.
Commercial No Income Verification Loan - New Program
No income and stated income commercial loans are making a little bit of a comeback in 2013.
There is a new program similar to many of the current hard money programs, but with lower rates (single digits) and fees that could be a good fit if you are looking to finance the following types of investment property:
- 1 to 4 family properties up to $1 million
- 5 or more unit apartments up to $2 million
- Mixed Use, Office, Retail, Industrial Warehouse, Self Storage, Auto Repair/Service up to $2 million
The program requires at least 30% equity/30% down, does not require disclosure of income, has minimal asset requirements and a 650 minimum credit score. There are a few drawbacks to the program: escrows/impounds are required for taxes and insurance and the loan would have either a 3 year or 5 year prepayment penalty. It is also not available in a few states.
Please contact us at 1-800-414-5285 for more information.
Hard Money Loan - The Recent Past
Prior to the recession you could get a hard money loan with either a lot of equity or a large down payment and little else. Back then it was more of a "once size fits all" market, because lenders believed that even risky loans would be okay as they assumed values would continue to rise. Well, that mentality buried a lot of them as property values fell across the board for almost all commercial property types.
This (old) variety of hard money lending is still around, but the rates and points involved are higher than before. Private lenders are still doing these loans for properties with obvious value that could be sold quickly in the case of default, but the lion's share of new loans are more of a hybrid between the old and new.
Hard and Private Money Rates, Points and Down Payment/Equity Requirements
The new vintage of "hard" and "private money" loans are differentiated by the level of equity and documentation required as well as the corresponding rates and points. Every scenario is different, but below are some basic guidelines and approximate rates:
- True Asset Based Hard Money - 40% to 45% equity/down payment, 12% to 13% interest or higher and multiple points (5 or more).
- Asset Based with Limited Review of Financials - 30% to 40% equity/down payment, 10% to 12% interest and 3 to 5 points.
- Asset Based with Full Review of Financials - 25% to 35% equity/down payment, 8% to 10% interest and 2 to 3 points.
Please note: We only assist borrowers with commercial hard money loan requests. We do not assist borrowers looking to finance a primary residence (residential property with 1 to 4 units).
We recently helped a client pull cash out of 2 recently acquired investment properties. The client had paid cash and was requesting a 65% cash out refinance. We were able to get them the following:
- 9.5% rate
- Interest only payments
- NO prepayment penalty
- 3 points
Interest Only Payments
Due to the short term nature of these loans and the relative risk involved lenders expect a higher rate of return for the use of their capital, but one silver lining is that the payments can be "interest only" during the payback period of the loan or built into the loan and due when the loan matures. Either way, this helps lower the burden on the borrower and makes the higher rate less of a factor.
Here is a payment comparison for a loan of $1,000,000 at 6% (principal and interest) with a typical 20 year amortization vs a loan at 9% with interest only payments:
6% Principal and Interest for 20 years = $7164.31
10% Interest Only = $7500
Difference = $335.69/month
As you can see, the difference in monthly payments is negligible despite the 4% spread in interest rate.
The end result of the math is less impressive when the calculation is done comparing traditional financing to a true asset based hard money loan at 13% and 6 points, but then again that may be the only viable way to get your project financed depending on your circumstances.
Due Diligence and Fees
Discount points and fees can be rolled into a refinance assuming there is room based on the appraised value and in some cases interest payments can be financed as well, but up front deposits are required to pay for all 3rd party costs (appraisal/market value estimate, site visit, inspections, legal fees, escrow, etc.)
These deposits are due once you accept a lender's term sheet or LOI.
Quick Approvals and Quick Closings
Speed, Flexibility and Creativity
The real value of hard and private money lending is the speed of approval and the speed of closing.
Lenders are typically private individuals, family offices, hedge funds, private equity funds or groups of investors and there is little regulation and red tape, so if they see a deal they like, they approve it. There is no protracted drawn out loan process like so many bank and institutional loans and the loans can literally be closed in days or weeks rather than a month or two.
Obviously, the use of funds and evaluation of the collateral will be scrutinized and the lower rate loans will require a much closer look at the borrowers personal financials as well as the project financials, but underwriting is unlike a traditional loan because so much emphasis is put on the collateral, the subject property/project cash flow and the exit strategy. (The exit strategy is crucial because the lender is typically looking to be paid back anywhere from 30 days to 36 months).
Many hard money loans (especially the higher priced variety) do not have prepayment penalties, but some loans have a penalty if you pay the loan back within a specified period of time - usually 6 to 12 months. This is because some hard money lenders will only lend based on a specific return on their investment and if you pay it back too quickly they will not achieve the ROI they expect.
Typical Uses for Private Money
Along with speed, the other major benefit to hard/private money is flexibility because lenders allow the funds to be used for a multitude of purposes.
Some of the more common uses are as follows:
- Opportunistic transactions with short closing timeframe's
- Bridge financing for improvements
- Purchase of an existing building from a bank, a distressed owner or auction
- Acquisition or refinance of existing buildings to be "re-positioned"
- Discounted note purchases
- Purchase of a foreclosed building
- Foreclosure Buyouts
- Blanket loan
- Bank "turndowns"
- Rehab of an existing building
- Purchase or refinance of a vacant property
- DIP - Debtor-In-Possession deals
Hard money lenders prefer to lend on "income producing" property, but lenders will lend on most types of commercial property including owner occupied businesses such as hotels.
Property types typically eligible for financing include:
- Multi Family and Apartment Buildings
- Hotel and Motel
- Mixed Use
- Light Industrial
- Self Storage
Hard Money Underwriting Checklist
There are still hard money lenders who evaluate transactions the "old" way (with very little documentation) due to their knowledge of particular markets, but many lenders now require a fair amount of documentation.
Not all of the information on the checklist below is required for all loans, but the lower the rate loans typically require more documentation.
Short description/summary of the Loan Request including:
- Loan amount needed
- Current "as-is" value of property (estimated)
- Estimated "as completed" value of property
- Source of down payment/equity
- Use of Funds (what you will do with the loan proceeds)
- "Exit Strategy"
Subject Property Information
- Location/Street Address
- Number of units
- Square footage/size
- Digital photos of property and/or copy of recent appraisal
- Survey or site plan (if available)
- Purchase or Acquisition - please include a copy of contract of sale/purchase agreement (fully executed)
- Refinance - please include details/summary of current financing as well as date property originally purchased and purchase price.
Income and Expense Statement/Profit & Loss to include:
- Property Taxes
- All Utilities including Water and Sewer
- Maintenance and Repairs
Ideally, most lenders would like to have operating statements for 2 years or a Trailing 12
For investment property please include a current rent roll including the following:
- Unit Type Breakdown (Residential vs. Commercial)
- Tenant names
- Unit Numbers
- Lease Expirations as well as Escalations
- Room count (including bathrooms)
For Office, Industrial or Retail please also include the following:
- Base Rent
- Unit Square Footage
- Expenses paid by Tenant(s)
- Personal Financial Statement
- Resume/Background/Track Record - Please provide background info on all Principals, Developers, Borrowers including experience relevant to project, info on current projects, past projects, other properties owned or developed.
Appraisal - Lenders will order their own appraisal or come up with their own fair market value for the property.
If looking for Secondary Financing, please provide copy of first mortgage details or loan commitment. Please note, secondary financing may not be available in all markets.
We work with some very reasonable (and quick) lenders nationwide, so there is a very good chance we can help you get the best terms with the quickest turnaround.
Please give us a call at 1-800-414-5285 if you need assistance with a hard money or private money loan.