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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2017

Take Advantage of Second Chances

Be prepared to act when a hard money borrower is ready to graduate to permanent financing

Hard money loans play an important role in the marketplace. First, they offer financing to those who otherwise would be without access to such credit, and they finance short-term borrowing needs with a quick turnaround.

Placing these loans enables a commercial mortgage broker to match a borrower to a lender, while also earning a fee. To bring even more to the relationship, brokers should make sure they follow up on their borrowers who took out hard money loans. These customers present tremendous opportunity because they will need a second round of funding.

Most hard money loans in today’s marketplace carry low loan-to-value ratios and terms of one to three years, at which time the loan is supposed to be repaid. That is why a commercial mortgage broker needs to maintain a relationship with such clients and track their deals. When a hard money loan is approaching its maturity date, an opportunity exists for a broker to handle refinancing for the client and earn another fee.

Second bite

There are times when long-term property owners need short-term hard money deals. Either they need an ultra-quick closing, or more traditional financing is not available to them because they are suffering through cash-flow or credit issues. This is where hard money loans come into play. For this borrower, the broker needs to place the transaction with a lender that best meets their client’s needs and can deliver in a timely fashion.

As the broker, you need to know when it’s time to approach a lender to assist a client in refinancing out of a hard money deal. This concept of a “second bite at the apple” also can apply to rehab loans that are originated through a hard money lender. If a property is rehabbed and stabilized with funds from a hard money lender, there is an opportunity for the broker to line up long-term permanent financing.

Time has a way of healing all ills for many borrowers. During a short-term hard money loan, borrowers can make property improvements, stabilize rents, improve their credit scores and acquire the seasoning of ownership that long-term lenders are looking for with their underwriting standards. These changes require the broker to take a fresh look at the deal and work to again match the borrower with the best lender for the transaction.

This is where you, the broker, will need to understand each lender’s requirements for seasoning, debt-service coverage ratios and credit scores. The sooner you start the process of prepping your borrower for this second round of financing, the higher the probability that you will get this second closing.

Polished application

Six months before a hard money loan expires you should be reaching out to your clients to determine their plans for the future and also take a hard look at their qualifications. You then need to give borrowers guidance about steps that can be taken in order to make themselves, and the property, as attractive to a lender as possible. You should discuss with them what a new loan would look like and what the costs will be.

Make sure that through the entire process you have listened to the borrower.

Ultimately, as the broker, it will be your responsibility to put the loan package together and submit it to the lenders you believe can fund the transaction. Make sure that this new package includes details about all the work done to the property, including receipts or invoices. Discuss in the presentation what has been done to make the property’s cash flow increase or to make it better suit the owner occupant.

Finally, if any credit issues remain, get an explanation upfront. Lenders don’t want to wonder why there was or is an issue. They want you to help explain it away. The more you do to polish this application, the better your chances are of completing the refinance and earning a second fee from the borrowers.

One of the other benefits of helping clients refinance out of a hard money loan is that you now give your hard money lender an exit strategy that matches its business plan.

When the hard money loan balloons at one, two or three years, your lender wants to be paid off so they can redeploy the capital. Your ability to accomplish this makes you a more valuable tool for this lender, and it also strengthens your relationship with the lender.

Long-term solution

Permanent financing, whether conventional or nontraditional, will usually carry a lower interest rate than the original hard money deal. So another big benefit of helping a client refinance a hard money loan is that your clients get a long-term solution to their real estate ownership needs and usually at a lower cost than the hard money deal.

The upfront costs of the permanent financing, even with a second broker fee, also will be less expensive. If the borrower has accomplished what they set out to do with the subject property, then the collateral is stronger. If there has been time to overcome credit issues, then the borrower’s credit has become stronger. As a result, the property and owner, after the initial hard money loan runs its course, normally are in better shape from an underwriting perspective, which means you and your client will be able to demand better loan terms.

The broker’s role in all of this requires some level of continual contact with the client during the term of the hard money loan. It also requires diligent tracking of term expirations so you can approach the borrower at the appropriate time about their permanent-financing needs. This second go around is all about creating a relationship with your borrower.

Make sure that through the entire process you have listened to the borrower. You must know what their endgame is. If the deal was always a fix-and-flip, then there is likely no second chance at handling the financing into a permanent loan for that client. That doesn’t mean, however, that you should walk away from the borrower.

If that client has not sold the fix-and-flip property by the balloon date on the initial hard money loan, you will need to play a role in solving that problem for the lender and the client. If a client was always intent on retaining ownership of the property, then this is where you get the chance for a second fee after the original hard money loan runs its course.

•  •  • 

Remember that sometimes the plan a borrower starts with is not what they end with. Stay in touch with your hard money customers.

Whether it is for a second-chance financing opportunity via refinancing a hard money loan, making a new acquisition or obtaining a referral, there is tremendous value in maintaining an active dialogue with your prior borrowers.

By keeping a database of who your borrowers are and were, what kind of loans you placed them in and when they may need refinancing, you increase your odds of earning a second fee. You want to be there whenever your customer has a need and especially when they are ready to graduate from their hard money deal.


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