Why do developers use hard money loans to finance real estate projects?
Developers use hard money loans for commercial real estate projects, because sometimes banks and other traditional financial institutions just can't help them when they need financing.
Some developers do not meet bank standards, or do not have the luxury of being able to wait on the slow process of trying to qualify for traditional financing.
Sovereign Capital offers hard money financing programs that provide developers with the benefits of flexibility and speed. Borrowers who have low credit scores, or who have properties that do not fit conventional mortgage requirements, can greatly benefit from a hard money bridge loan.
After a completed loan package has been approved, the average closing time is just two weeks.
What is a hard money loan?
A hard money loan is a loan on commercial real estate, which uses the subject property as a collateralized asset to guarantee repayment of the loan. Funding for a hard money loan is based the subject property's hard value, or quick sale value; not on its retail value, or appraised value.
What is a bridge loan?
A bridge loan is a hard money loan on commercial real estate that is used for a short period of time, usually up to three years, between the initial requirement for funds and a future permanent financial solution. Bridge loans are collateralized by the hard money value, or quick sale value, of commercial real estate.
On what kind of property do you offer hard money financing?
Sovereign Capital's funding sources offer hard money financing for commercial properties located in the United States.
How do you determine the value of a property used as collateral for a hard money loan?
When commercial real estate is used as a collateralized asset to secure a hard money bridge loan, the subject property's quick sale value is used to determine its loan to value, not its retail, or appraised value.
A commercial property usually requires an extensive investment of time and money to resell at its appraised value. A hard money lender is not a bank or traditional lender, and does not have the luxury of maintaining a real estate department to manage and sell its properties. For this reason, a hard money lender must liquidate a property held in inventory as soon as possible.
What size hard money loans do you offer financing for?
The minimum amount that can be loaned is $1,000,000, and the maximum amount that normally can be considered for financing is $100,000,000.
All loans must be made on commercial property, not residential property.
What is the maximum loan to value allowed for a property used as collateral for a hard money loan?
The maximum loan to value allowed is 50% for land, and 65% for other kinds of commercial property, based on the collateralized property's quick sale value.
A borrower must always have at least 20% cash or equity invested in a property.
The remaining 15% of the property's value can be financed in the form of a seller carry back or other subordinated 2nd mortgage.
Why must a borrower always have at least 20% cash or equity invested in a property?
Because of the inherent risk involved in funding a hard money loan.
Hard money loans are made on commercial properties. The borrower is not getting a loan on his private residence, so he is not putting up his own house as collateral. The funding source requires a 20% cash or equity investment from the borrower, in order to provide more security for the loan, and to ensure that the borrower will be less likely to walk away from the property, if he experiences financial problems during the term of the loan.
Why is it important to have an exit strategy?
An exit strategy is very important because it shows the lender how the borrower plans to repay the loan.
A hard money loan is a short-term bridge loan that will normally run up to three years. It is not a permanent solution to a developer's financing problem. At the end of this three year term, the subject property will have to be refinanced, or the property will probably be sold.
A hard money bridge loan must make good financial sense for both the funding source and the borrrower.
What is a blanket loan?
A blanket loan is a hard money loan that cross collateralizes more that one piece of property under a single loan in order to meet the 50%-65% loan to value requirement.
Sometimes a commercial property will not support a 50%-65% loan to value. However, if the borrower has other commercial properties with equity, these properties can often be used to meet the loan to value requirement by creating a new blanket loan.
Examples of Hard Money Loans
How does the hard money loan process work?
First, a developer completes and submits the Hard Money / Land Acquisition and Development Application, making sure to complete the executive summary part of the application.
Next, comes an initial review of the developer's application by the funding source to see if it meets the required lending criteria. An application is judged on factors such as, the size of loan requested, type of property, location of the property, ratio of income to expenses, loan to value ratio, borrower equity, etc.
After the initial review, the borrower will be notified within a few business days, as to whether or not the loan process can proceed. If the loan application has met all lending criteria, the due diligence process can begin, and hopefully work toward the successful validation of all of the borrower's information.
When the funding source decides it can proceed with the process of due diligence, the borrower is sent a Letter of Intent which includes a term sheet.
After the borrower has received a Letter of Intent, he must sign it and return it with a deposit, to cover the down payment on the 3rd party costs of due diligence.
Next, the developer completes the commercial loan application and submits it. After the funding source has reviewed the completed commercial loan application, the borrower will receive a final loan decision.
A new hard money loan will be funded approximately five to seven business days after it has been approved.
What is due diligence?
Due diligence is the process of financial examination and discovery, of the subject property and potential borrower, from a perspective of risk.
Prior to committing capital to a project, the funding source must have a goal of exercising reasonable care, to understand the inherent risks associated with loaning money on a commercial property.
When examining an application for a hard money loan, the funding source must review documents and other information, including appraisals, quick sale value, profit and loss statements, tax returns, title and survey reports, etc., to verify that all borrower information is accurate. There must also be a legal review of the new loan by the legal council for the borrower, and by the legal council for the funding source.
Does a borrower pay upfront fees when applying for a hard money loan?
Sovereign Capital's funding sources do not charge up front fees.
However, when a borrower is issued a Letter of Intent with a term sheet, he will have to make a deposit for a down payment on the 3rd party costs of due diligence, before the loan closes.
When a borrower is issued a Letter of Intent, it means the funding source has reviewed the loan request, plus photos, financials and other documents, and has already made a determination to fund the new hard money loan, pending a successful outcome of the due diligence process.
If the borrower has been honest and forthright with all information submitted in his loan package, he can be reasonably sure that his loan will be funded.
How much deposit is required for the down payment on the cost of due diligence?
When the Letter of Intent is issued, the borrower should plan on making a average minimum deposit of $5,000 to $15,000 to be applied as a down payment toward the 3rd party costs of due diligence.
Due diligence costs include the cost of an appraisal, title report, preparation of legal documents, escrow costs, an on site inspection of the property by the lender, etc.
All costs incurred by the lender for loan origination, processing fees, points, etc., will not collected up front and will not be taken out of the borrower's deposit.
At closing, the amount of the borrower's deposit will be credited against the costs of due diligence, and any balance will be refunded to him. Furthur, in order to cap the borrower's out of pocket expense, if the cost of due diligence exceeds the borrower's initial deposit, the lender will wrap the extra cost into the new hard money loan.
Land Acquisition and Development
Hard Money / Land Acquisition and Development Application
Resources: Financial Links /Glossary