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Tag Archives: Private lending

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.

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.

4 Qualities To Look For In A Private Lender

When looking to fund a commercial project, bank loans are a slow and painful process. This is why many people turn to private lenders instead. The loans are approved much more quickly, they’re willing to take on riskier projects due to the asset-based lending format, and you get to build a working relationship with your lender to make future dealings much faster.

However, finding a private lender isn’t as simple as contacting your local bank. In order to help you find the right private lender, we’ve put together five qualities that you should be looking out for when you want to find the right private lender for your needs.

   1. The lender offers you flexibility

If a lender is not willing to negotiate the terms of your hard money loan, then they’re likely not someone you want to deal with. Private money loans are known for being flexible with repayment terms, collateral and generally any variable that could be changed. Without this flexibility, it’s not much different to a regular loan from a bank.

  2. The lender is willing to communicate

Private lenders should be treated differently than your regular bank lender. They should be far more responsive to your questions and concerns and they should be able to provide you with detailed answers to any concerns that you might have. Some lenders also make great advisors because they have experience working with commercial clients, so don’t neglect the importance of a lender that is willing to communicate.

  3. The lender has a good reputation

If you’ve been recommended to a private lender by a friend or mentor, then it’s already a good sign that they have a good reputation. However, it’s never a bad idea to ask around in order to verify that the lender you’ve picked is a good choice. Reputation is important when it comes to large sums of money.

  4. The lender has competitive interest rates

It should be clear that one of the minor problems with private lenders is that their interests are usually a little higher in order to compensate for the shorter loan terms. However, you can still find competitive interest rates with private lenders, and it’s a good idea to be in contact with several lenders so you can compare their rates.

 

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.