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A Glossary of Hard Money Lending Terms

After rehab value (ARV): The market value that the investment property is expected to have after it has been improved or renovated.

Appraisal: A professional estimate of how much the property is currently valued or will be worth after updates.

As-is value: The property value as it exists, as of the appraisal date.

Bridge loan: A short-term loan used to bridge the gap between one obligation and the next. Bridge loans are a great way to move from one investment to another.

Capitalization rate: A real estate valuation measure used to compare different real estate investments. It represents the ratio between the net operating income produced by an asset and the original capital cost or its current market value.

Commercial use: A property with no residential component that is only used for a business.

Cross-collateralize: A lending technique in which collateral for one loan is also used as collateral for another loan.

Default: The failure, for longer than 30 days, to meet the legal obligations of a loan.

Distressed properties: Properties that are in poor condition or near foreclosure.

Draw schedule: A detailed payment plan for construction projects. This schedule helps hard money lenders determine when they need to provide funding to borrowers based on the work completed.

Escrow account: An account run by a third party that disburses payments based on the loan agreement. The money is typically used to cover property taxes and homeowner’s insurance.

Exit strategy: A real estate exit strategy is how the borrower plans to pay off the loan and reduce liability. It is a plan for how to exit one situation for a better one. Tip: have three exit strategies in mind – a best-case scenario, back-up, and “last-ditch” plans. Here are four common exit strategies.

Foreclosure: The process through which the lender legally takes control of the property due to the borrower missing loan payments.

Guarantor: The person who promises to pay a borrower’s debt if the borrower defaults on their loan.

Hard costs: Direct costs relating to the construction or improvement of a building or structure.

Hard money loan: Also called a private equity loan or a private money loan, a hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real estate property.

Holdback: The portion of a hard money loan that is not paid until the project reaches a certain stage, such as completion of the framing.

Holding costs:  Costs associated with owning a property for a period. This includes insurance, taxes, and utilities.

HUD-1: A form that lists all the transaction cash flows between the property’s buyer, seller, and lender.

Interest Rate: A percentage of the principal loan amount charged by the lender for use of money.

Lien: A legal form filed by a lender showing possession of property belonging to a borrower until the debt is paid off.

Liquidity: How quickly an individual or firm can purchase or sell a property due to having cash on-hand.

Loan broker: See: real estate broker below.

Loan officer: Person who evaluates, authorizes, or recommends the approval of loan applications.

Loan points: An origination fee. One point is equal to one percent of the loan’s principal amount. Two points on a $100,000 loan would be $2,000. Most private money/hard money loans fall between 2 and 5 points.

Loan to Cost (LTC) Ratio: Compares the financing amount of a commercial real estate project to its costs. It is calculated by taking the loan amount and dividing it by the construction cost.

Loan to Value (LTV) Ratio: Compares the proposed loan amount to the appraised value of the completed project.  (Loan amount divided by appraised value)

Maturity: The date the final payment of a loan is due.

Private lenders: Individuals or companies that lend to real estate investors and developers. Finding the right private lender can be tough – here are five qualities to look for in a private lender.

Proof of funds: A document or bank statement proving that a person has the financial ability to perform a transaction.

Real estate broker: Someone who acts as an intermediary to facilitate real estate transactions. In the case of a hard money loan transaction, they gather important information from the borrower such as income, employment documentation, and credit reports to assess how much the borrower can afford.

Real estate investor: Someone who purchases properties with the goal of making a profit, either through renting or reselling.

Refinance: Replacing an old loan with a new one. Typically, people refinance to take advantage of a lower interest rate, but can also refinance when an old loan becomes due.

Scope of Work: An outline of all the renovations scheduled to be completed before the property is sold, including their estimated costs.

Short Sale: A situation when a seller is selling their property for less than they owe on their loan. A bank or lender must approve the sale at the lower price.

Soft costs: Non-construction costs such as legal, financing, architects, etc. required for the project.

Title: Proof of ownership on a real estate investment property.

Turnaround time: The amount of time from when an investment property is purchased to when it is sold.

Underwriting: The assessment of how much risk a lender will take on for an investment property. Underwriters will verify the borrower’s income, assets, debt, and property details before approving a loan. Hard money and private money underwriters are typically more concerned with the property’s value than the borrower’s credit history.

Five Ways for Builders to Reduce Waste

Five Ways for Builders to Reduce Waste

Can you guess the volume of construction waste generated annually by construction projects worldwide? What about the U.S. alone?  According to a report from Construction and Demolition Recycling in 2018, the world’s yearly volume of solid waste will nearly double to 2.2 billion tons by the end of 2025. Construction waste makes up more than half of overall waste generated annually. This includes materials such as wood, shingles, asphalt, concrete, and metal.

construction waste from a building

Additionally, construction continues to be costly. In August, construction input prices increased by 0.6 percent from July according to an Associated Builders and Contractors analysis of the U.S. Bureau of Labor Statistics’ Producer Price Index. Nonresidential construction input prices were up 0.3 percent for September.

Much of this waste can be recycled or reused; however, sometimes after a long day of labor, sustainability, and care for the environment can be overlooked. That said, sustainable building practices are growing in popularity and builders are finding competitive advantages in saving on material costs or cutting costs associated with waste. Below are five strategies to reduce waste on your job site.

  1. Reduce Packaging

Work with manufacturers to minimize packaging around products such as plastic, cardboard, and paper to reduce waste that will end up in your dumpster. Approximately 10-12 percent of a construction project’s waste comes from cardboard.

How to Reduce

  • Purchase materials in bulk instead of individual packages.
  • Use returnable containers and packaging materials.
  • Reuse non-returnable containers. You can hold materials in tubs, barrels, and buckets.
  • Donate non-returnable containers to community organizations if you aren’t using them.

 

  1. Reuse and Recycle

Place recycling bins on the job site, or at the end of the day, sort materials into a reuse pile instead of throwing everything into the dumpster. This not only helps the environment but will help lower transportation and landfill costs.

Recyclable materials:

  • Asphalt
  • Brick
  • Concrete
  • Carpeting
  • Cardboard
  • Drywall
  • Gravel
  • Metal
  • Paper
  • Plastic
  • Roofing
  • Wood
  • Sinks
  • Countertops
  • Baths

You can recycle these materials at a construction and demolition (C&D) recycling facility if one is available in your market, and rates are typically competitive with landfill tipping fees. Lastly, try to sell unused materials back to the supplier.

  1. Deconstruction Instead of Demolition

Deconstruction is the process of selectively disassembling a building piece by piece to preserve materials and eliminate waste. The salvaged materials can be reused and transformed into valuable resources that can be sold to be used on future construction projects. Additionally, donated materials can be used as tax write-offs.

The demolition process is similar to that of deconstruction in its removal of high-value, reusable materials. However, the main difference is there is a lower chance of preserving materials through demolition because the process is focused on speed.

  1. Proper Material Storage

Make sure that your products are stored away from the sun and water. Covering your materials will help prevent having to buy new supplies as a result of tossing rotten ones due to degradation from the elements. Secondly, properly storing your materials will avoid theft and the costs associated with replacement.

  1. Plan Your Materials Ahead of Construction

Planning and proper organization means fewer mistakes and fewer materials being wasted on the job site. You can reduce labor and product costs by properly measuring and ordering the right sizes of materials – this prevents cutting or altering larger-sized products. If you have scraps from cutting materials down, try to reuse them. For example, small pieces of wood can be shredded down into mulch if they’re not stained or painted. A plan that includes the following would help reduce waste disposal:

  • Account for potential waste
  • Supply the job site with recycling, compost, and waste bins
  • Calculate the exact amount of materials and order only what is needed
  • Identify recyclable materials
  • Educate workers on sorting waste as it’s produced

The price of dumping materials is becoming more significant to builders as the costs of materials continue to increase. The less you throw away, and the more you reuse, the less money you spend on construction waste disposal. Consider these five ways to save money and the environment by reducing construction waste on your next build.

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

What is Geotechnical Engineering

Geotechnical engineering, also known as geotechnics, soil testing, or soil analysis, is the evaluation of the earth’s components before starting a construction project. Most examinations include surface and subsurface exploration, soil sampling, and laboratory analysis.

Significance with large construction projects

The characteristics and quality of your soil play a vital role in how a building is constructed. It’s best to have a professional analyze the soil before any construction begins to determine if it’s suitable for your project. They will test the soil for strength, organic material, contamination, and density, among other things in order to:

  •      Identify types of soil on the property
  •      Identify whether the soil can support your desired construction project
  •      Create safety reports, which are often needed to obtain a building permit

All the information gathered by the engineer is then used to determine important factors about your construction or multifamily project. For example, if the results show sandy soil, you will likely need a different type of foundation than if you were building directly on bedrock.

Soil testing can help determine drainage issues, the placement of your septic or sewer system components, the size of the structure, and whether the soil or bedrock would support a structure in an earthquake. These investigations are important in preventing human and material damages.

When is goetech testing needed in the construction process?

Soil testing is typically required for building permits. During the construction phase, the soil engineer may need to take further soil samples to ensure the soil conditions are compatible with those observed in the initial testing – and will make recommendations as needed.

What do you do if your soil isn’t right for your construction project?

If your soil has any issues your geotechnical engineer should be able to provide you with recommendations on how to address the problem. The solution could be installing wider, deeper footings, or digging out the bad soil and replacing it with engineered soil. No matter what they recommend, you’ll want to get it in writing and share with your structural engineer and building inspector.

Pricing and how to structure construction loan terms to get this included

There are many factors that play a role in the cost of your soil test, such as the type of testing you perform and size and site of the proposed project.  The more comprehensive the analysis, the more expensive the testing will be. Talk to your lender about your options. If there is room, some lenders will incorporate the testing into your loan – allowing you to pay it off through the course of the loan.

Geotechnical engineering can be crucial to the integrity of your construction project. Make sure you have the time and budget put aside to get it done right.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.

Mortgage Broker vs Direct Lender

You’re in the market for an investment property and you’ve found a viable project, and your next step is securing a loan. For some, this is the most stressful step. You want to ensure your finances are in shape and examine your credit score before deciding where to apply for your loan. This used to be a simple matter of walking into a bank or credit union. Today there is a wide range of options, including mortgage brokers and direct lenders.

What is a mortgage broker?

Mortgage brokers assist in comparison-shopping, serving as middlemen bringing borrowers and lenders together, but do not actually fund the loan.

They gather pertinent information from the borrower, such as income, employment documentation, credit report, etc. to assess how much a borrower can afford. The broker will then determine the loan amount, loan-to-value ratio and type of loan they see fit for the borrower and submit it to lenders. Once you’ve selected the lender and been approved, you work directly with the service provider or loan originator.

What is direct lending?

Exactly what it sounds like – direct. Instead of going through the middle-man, a direct lender usually can do everything in-house. They employ experts in various divisions like underwriting, asset management and loan servicing to help ensure your loan is processed accurately. Direct lenders can do everything from inspecting your credit to handing you your check. A direct lender is a one stop shop.

For the best results, be sure to research direct lenders before you apply. It can make all the difference in securing more funding and better customer service.

Flexibility:

Typically, a mortgage broker is bound by guidelines that are set by the individual lender, meaning they do not have the discretion to adjust the requirements to gain your business. A direct lender sets their own lending guidelines, allowing them to waive requirements under certain circumstances.

Fees:

Both a mortgage broker and direct lender charge fees, which could include origination fees, application fees and appraisal fees. However; the fees charged by the mortgage broker are usually higher than those of a direct lender. Direct lenders don’t typically charge prepayment penalty fees and are transparent about the fees they charge. While the prices may vary, the knowledge, expertise, and dedication of a direct lender is very important.

Speed:

Since operations are done in-house, direct lenders can provide funding quickly – deals can be completed within weeks. Compare that to a broker who has little control over the processing of your loan.

Personalized Solutions:

Either a mortgage broker or direct lender can provide you with loan options. Before choosing, you may want to ask for quotes from both and compare.

A mortgage broker can help you compare many quotes more easily, therefore saving you time on shopping around and applying to numerous direct lenders. But, if you want the loan approval and funding more quickly, then working with a direct lender may be your preferred route.

At Broadmark Realty Capital, we offer competitive rates on a wide range of loan programs. Our lending experts will take the time to understand your project, financial needs and goals in order to create a personalized loan solution.

 

What is hard money lending?

Let’s break down hard money lending in detail.

We suppose the best way to introduce this topic is to start with the basics. What is a hard money lender and why do they matter? For starters, private lenders aren’t banks. A hard money lender is a non-institutional company (or individual) that loans money typically for the purpose of funding a real estate deal.

Why Hard Money?

The easiest way to break down the benefits and drawbacks of hard money lending is to compare private lending with banks. Let’s try and simply Pro / Con list.

Hard Money Lending Benefits

As we’ve covered before, speed is probably the largest advantage of private lending—funding can be secured extremely quickly and the qualification process is much less laborious and intricate. In most situations, these deals can be completed and funded within a week. Compare that to the 45-60 days it takes, on average, to secure a bank or credit union loan. The application process usually takes 1-2 days, and sometimes can be completed the very same day. Needless to say, speed is a huge advantage, especially if you’re trying to secure a property against other competing bids. A quick close with a private lender can entice sellers and set your offer apart from other buyers with slower, more conventional funding.

Some other benefits include:

  • No rigid lending requirements. The lender and the borrower can set their own terms according to their needs.
  • Much less emphasis is placed on income requirements and credit scores. More focus placed on the value of the deal rather than the history of the borrower.
  • No high prepayment penalty fees

Hard Money Lending Drawbacks

  • Loans typically are accompanied by a higher interest rate compared to traditional banks.
  • Most loans are short-term (banks can extend to over 20 years) and lenders expect to see a detailed exit strategy.
  • You must clearly show the property’s income potential—which can be challenging on a tight budget and timeframe.
  • A poor or mediocre loan-to-value ratio will put you in the position to cross-collateralize to reach your full amount requested.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.