COMMERCIAL HARD MONEY LOAN
COMMERCIAL PRIVATE MONEY LOANS 101
Hard Money Loans are a great and creative way that has made its way in the Money Lending industry over the past few years because of the economy and banks being a lot more careful about their loans, these changes have made Hard Money Loans a great asset to your portfolio, and will certainly help your clients. As loan originators, we have to know all the options the market has to offer and Hard Money Loans can come in handy when there are significant changes in our clients’ lives. However, Hard Money Lenders like ourselves know beforehand that Hard Money Lending is an investor’s world therefore they are not your typical lenders, there are requirements your client must meet in order to close a Commercial Hard Money Loan.
These investors are private individuals, or partnerships; Who are willing to lend money but they will do it as long as the ROI is higher than traditional lenders since their own capital is the one at risk.
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Commercial Hard Money is a much more complex process than Residential Hard Money.
Investors will analyze the borrower like on any other Residential Hard Money Loan but they will pay much more attention to the commercial property, and by that we mean they will look at every detail since there is often situations where there is something unusual about the property or the borrower, That process could bring the transaction to a complex but not impossible Commercial Hard Money Loan.
Most borrowers in need of residential hard money loans have the following reasons :
Lack of employment, low credit scores, personal emergencies, health issues and so on; all of these scenarios sometimes go hand in hand with commercial hard money, plus you have to keep in mind the fact that the income of any commercial property can change or that there may have been a change in the use of the property.
Also your client cloud have pending judgments, liens and bank rejections these may be why he’s opting for a commercial hard money loan.
Our best advice on any kind of Commercial Hard Money Loan transaction is that you must know and understand ALL the reasons and variables that can come into play as why does your client, the borrower need that Commercial Hard Money Loan.
Once you understand your client’s situation you can start to look at all the other factors.
First: The property must have equity. The industry standards are 70% LTV on residences, 65% on apartment complexes, and 50% LTV on land. Very rarely you will see an investor doing Commercial Hard Money Loans over owner occupied, industrial or special use properties.
Equity is what makes a Commercial Hard Money Loan possible, therefore the appraisal will be the main factor to obtain a Commercial Hard Money Loan for your client and he must know that the LTV will determine the risk to the investor, your job is to obtain the must accurate appraisal for the sake of both parties and your reputation as a Commercial Hard Money Originator.
Now that the equity and the LTV has been determined comes the exit strategy or how the borrower will repay the loan, this is of great concern for a commercial hard money lender. They will make sure that the borrower has a realistic plan for repaying the loan, otherwise you’ve wasted everybody’s time.
This all should be explain on a very detail presentation and be submitted to the private investor, partnership or corporation.
These private parties will demand of you to be diligent in providing precise information and paperwork on behalf of your client. Most of them have a list of documents you
must provide along with credit check, income garnered from the property, current title, and expenses of the property.
This step is key, a well presented Commercial Hard Money Loan package will help you earn a good reputation and get the loan for your client.
Go the extra mile, offer investors to inspect the property personally, give them the demographics of the location, traffic, access and information about similar businesses in
the area, and always get environmental reports.
Each investor has its own guidelines but you must go into every loan with the mentality that this must be a win – win situation for everybody otherwise move on to the next Commercial Hard Money Loan.
Value your time – Minimize the time, Maximize the Profit.
There is no time off – Fix and Flip is a Full Time Job
Never stop learning – Every Hard Money Loan and Every Flix and Flip will teach you different aspects of the Real Estate world.
Experience is overvalued – Everyone Learns Different
Be courageous – and ask family and friends to invest with you. We will show you how.
COMMERCIAL LOAN MUST HAVE DOCUMENTS
These are the documents that will let know the lender the cash flow of a property and finances of the borrower to support the loan.
General Documentation
It does not matter which type of commercial property you are trying to get a commercial loan or hard money commercial loan.
This general documentation includes.
– Location of the property :
Not only the physical address of the property but also get a copy of the blue prints of the building and information about main roads of access, traffic, general demographics of the area, take pictures and video of the property; why both? with video you can show the size and layout of the property in a continuous mode; where as with pictures you may confuse
the lender about the layout and size of the property.
– The loan specifics and loan request:
Meaning length of the loan, reasons why your client needs the loan, what is the loan going to be used for, and exit strategy.
– The borrower’s profile :
This is where you can show your client’s past experience managing loans and operating
that type of commercial property.
These are the first things you must introduce to the lender or hard money investor.
Always keep in mind a well done introduction and a detail written executive summary is the best way to approach and generate interest from Commercial
and Hard Money Lenders.
Property Information
The property must be able to cover the debt that will be placed on it. The best way to know this is to apply a debt coverage ratio.
The cash flow from the commercial property must cover at least 1.2 times the debt placed on it.
To confirm this, the lender will require from the borrower to submit detailed financial statements for the property, the gross income and net income, expenses, payroll and utility bills are among the most common documents a commercial lender will require, for the last 24 months, to show that property is stable and has run making a profit.
Third Party Documentation Be prepared to summit or to help obtain some documentation that must be ordered from other parties other than the borrower, or the property itself.
Commercial and Hard Money Commercial Lenders need a clean title so they can have a clean lien placed on the property once the loan is approved.
Most commercial properties are held by corporate entities and are used for business purposes, the Commercial Lender will ask for additional commercial insurance to be placed on the property.
The borrower must show proof of acceptable insurance in order for the loan to close.
There is always a limit as far as the Lending Terms Commercial Lenders have maximum loan to value ratios. Most of them will max out at 80% loan to value, or LTV.
As a loan originator you must determine the value of property first by conducting a BPO (Broker’s Price Opinion) where you will compare the subject commercial property with six similar other properties in the area, three of them recently sold and three similar listed properties, after this is done have an appraisal done on the property. This appraisal must be done within 30-60 days of loan application.
Commercial and Hard Money Lenders requirements vary, it is your job as a hard money loan originator to keep both parties as informed as you possibly can and to collect all the required documents before applying to the lender.
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