Home > Commercial Hard Money - Issues
There's a fine line between commercial hard money and commercial bridge loans, and as the credit crisis persist most bridge lenders are enjoying the best times ever. Because many conventional lenders and banks are no longer funding loans. As a result virtually all hard money/bridge lenders are "cherry picking" and have a more take it or leave it attitude towards borrowers, as they are overwhelmed with the cleanest deals they have ever seen.
Below we discuss some of the common issues, what to watch out for and how to prepare yourself so that you can have the best chances of getting your commercial hard money loan closed.
Commercial Hard Money -Value
Value is always one of the biggest obstacles. Whatever you think your property is worth, the lender will probably discount it by 20% -40%. They think of value it terms of "lights out". I.e. what the property would sell for with the utilities cut, plumbing out, cobwebs up, etc after the property has sat vacant for months in a state of foreclosure.
Your appraisal company thinks of value in terms of "fair market value without undue influence." They also normally use a 9-12 month sales time frame vs the hard money lenders sale time frame of 3 -6 months.
Although its easy to get frustrated on this issue, the lender is trying to protect their capital as the default rates on this side of the business are very high.
Commercial Hard Money Lender
Picking the right commercial hard money lender is critical. Get a referral. Perhaps your attorney or CPA has recommendations. If you work with a broker make sure they are experienced and if they try to collect the good faith deposit in their name, walk and walk quickly. The check should be written out to the lender.
Obviously, we want to talk with you as well, and we get paid when your loan closes. In addition, we still have that thing called integrity and want to grow our reputation as a solid source.
If you go with the wrong lender, you will most likely work on the deal for several weeks/months and they will either take the good faith deposit and do almost no work, or will call you and collect additional items etc so that you think they are really trying to get it done; but it's a just acting. Yes this might sound paranoid but keep in mind this is the "Wild West" of the commercial mortgage business. There are almost no regulations over commercial hard money lenders.
Or they might quote a strong rate and fees in the beginning than just switch all of the terms and give you a take it or leave it offer, after the loan is ready to close. Often the borrower has no choice but to accept the new terms and the lender knows it. If you haven't seen a Letter of Intent from a hard money lender lately, take my word that it holds no commitments at all. The legal language is very clear that the lender has the right to cancel the deal and or change the terms whenever they want, without recourse from you.
Every deal has issues but if you look at value in their way, and go with a reputable lender, you will be in a much better position to have you loan closed on time and with the original terms quoted.
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