Ways to Finance Real Estate Without Using Bank Loans- Hard Money, Private Loans, and Bridge Loans

Date: 2010-03-09 23:02:29

By Jim Frey

A hard money loan (also called private money loan) is a type of collateral loan. You receive loan funds secured by real estate. Often hard money loans are issued at much higher interest rates than conventional commercial loans and are rarely issued by a bank. Hard money can be used as, and is similar to a bridge loan. A bridge loan has similar criteria for lending as well as cost to the borrowers the main difference is that a bridge loan often refers to commercial real estate that does not yet qualify for traditional financing.

For instance:Not too long ago, someone wanting to purchase a hotel, or even build a new hotel, could find a SBA lender and get a standard SBA loan for the hotel. Today, it is much harder to find a SBA lender willing to fund hotels because of the economy and the hotel's default rates. I was working with a family that had years of experience and proof that they could buy a distressed hotel and turn it around well. They were ready to do it again recently. SBA lenders would not touch it. So I found two options for the buyers to use hard money and/or mezzanine funding.

Mezzanine funding is a mix of debt and equity (ownership) financing that is is typically used to finance the expansion of existing companies but can be used for acquisitions and mergers. Mezzanine financing is debt that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time or not paid in full. It is often subordinated to debt provided by senior lenders such as banks.

Most hard money mortgages are made by private investors. Some private investors stick to their local areas. Usually the personal credit status, FICO and credit score are less important, as the loan is secured by the value of the real estate. Typically, the biggest loan one can expect would be between 65% and 70% of the property value. That is, if the property is worth $1,000,000, the lender would advance $650,000 to $700,000. This low LTV (loan to value) provides added security for the lender, in case the borrower does not pay and they have to foreclose on the property.

There are many reputable hard money lenders. However, like any industry or niche, there are those that take advantage of borrowers. They may impose sudden interest rate 'bumps', higher points up front or with a prepayment, and may not be credible. Some even collect large up front fees and string borrowers along for months and months. While up front fees are typical, a legitimate borrower will charge a reasonable fee and should take only 1-3 months to approve something. As always, research and read the proposals and agreements. Perform your due diligence.

Bridge Loans are used very often, even along side regular bank loans and SBA loans. Bridge loans are often anywhere from 6 months to 5 years long. Many times a start-up franchise would require construction or build-out to take a building from a 'raw' state to the finished, furnished, ready-to-move-in setting. For leased locations, this build-out typically can take 6 to 9 months. For ground up construction, the process can take 9 to 18 months.

Some banks use a bridge loan to finance the construction period and then use a permanent long term loan to 'take-out' the bridge loan. The bank may provide the bridge loan in-house or use a third party lender to fund the bridge loan and then use the bank's permanent long term loan. Bridge loans are often interest only and can be 2% - 5% higher, or more, than regular loans. They may include interest reserves or other reserves to protect the project as it progresses.

Bridge loans allow someone to buy a business or building that may not be performing well now but with a short term effort, could


Author

Jim Frey is a former VP of a billion dollar bank and currently a commercial loan broker, speaker, author. Jim enjoys helping entrepreneurs find alternative ways to finance projects. Get his free ebook at http://www.doughforthedream.com or listen to podcasts http://www.doughforthedream.podomatic.com. This articles came from MoreArticles.net.


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