Online Financial Tips

Archive for October 31st, 2011

As a commercial mortgage professional who deals in private (hard money) lending one of the most frequent questions I am asked “What loan amount can I get?” Privately funded loans are much less standardized than conventional, institutionally funded loans so there are no hard-and-fast rules. However, I speak to lenders and investors everyday and can offer the following guidelines.

Land

Private lenders shun raw land and fear rural land. Hard money people think in terms of a quick sale if they (God forbid) have to take back the dirt. Raw, un-entitled, land and farm land are among the most difficult to sell quickly. If you are for fortunate enough to find a lender willing to make a deal on either of these two property types, do not expect to be offered more than, the lesser of, 50% of the purchase price or 50% of the collateral’s quick-sale value. If the land can’t be financed conventionally and you are looking for hard money, be prepared to put down a huge down-payment or have the seller carry-back a big 2nd.

Properly zoned and fully entitled land with all permits in place is a valuable commodity, even in today’s challenging real estate market. Land, however, does not produce income and therefore can not pay its own mortgage the way a hotel or an office building can. For this reason, most private lenders will only lend up to about 65% against land unless there are special circumstances. Further, if a borrower can’t demonstrate means to make payment on-time, lenders will insist interest payments are held by a third party as an “interest reserve”. In this way lenders are protected. Any interest payments not made, due to early pay-off, will be returned to the borrower.

Vacant Buildings

From a lenders perspective, a vacant building or a building that is underperforming has the same problem that land has; insufficient income. (apart from the borrower) The loan amount that will be offered by a private commercial mortgage lender will depend on the extent of the vacancy and the condition of the building. You won’t find any lenders in helping you acquire a vacant building unless you have a sound, well thought-out plan for leasing it up in short-order, and even then LTVs will be in the 50% range. Partially rented facilities with some income being generated might fetch as much as 65%. But again borrowers must have a plan in place to fill the space up ASAP.

Income Producing Buildings

This category is the most sought-after type of collateral for hard money lenders. A lender has a lien on the income a building produces not just the building itself. So, in the event of a collection or foreclosure scenario, rental income mitigates the costs of a reposition action. Investors and property owners can expect to receive loan proposals of between 60%-70% of value or purchase price, whichever is lower. Apartments, office and retail are the most prized asset with warehouses and self storage facilities a close second. Industrial facilities are lees attractive to lenders because often it’s the business, not the real estate, responsible for the income generation.

The LTV numbers I mentioned above are typical but are by-no-means definitive. The important thing to keep in mind about hard money loans is that they are offered by private finance firms or wealthy individuals. These lenders are free to be as flexible as they wish, after-all, it’s there money. Keep these guidelines in mind, but, don’t hesitate to pitch your deal to any private lender. If the deal is strong and you can sell the merits of it, you might just get lucky and receive more than you thought you could.