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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2007

Ins and Outs of Commercial Hard Money

Boost your pipeline by understanding the basics of this lucrative market

Many residential mortgage brokers are branching out to other loan products to compensate for slower originations. One area some are exploring is commercial hard money.

To understand hard-money lending, you must understand hard-money lenders. These lenders are individuals, partnerships, corporations or money pools that invest in mortgages. They expect higher returns than on other traditional investments. To be a successful hard-money originator, you should think like a private investor. Ask yourself, “Would I risk my money in this loan?”

What’s the story?

Commercial hard money is a bit more complicated than residential. In residential, lenders typically look only at the borrower. In commercial, lenders look closely at the property, as well.

The main reason loans are submitted to hard-money lenders —residential or commercial — is that there is something wrong or unusual with the property, the borrower or both.

In residential hard money, borrowers may have many reasons for turning to hard money. Reasons can include job loss, divorce, medical crisis, mortgage default or other personal issues. In commercial, there usually is something wrong with the property’s income or a change in its use. Other situations, such as taxes, liens, bank turndowns, judgments, unusual ownerships and business opportunities, may cause commercial borrowers to go the private-money route.

It’s important, therefore, to find the real story behind each loan request.

Know the rules

You must also understand the basic commercial hard-money lending rules. The borrower’s equity in the property is key. The standard guidelines for hard-money loan to values (LTVs) are: 70 percent on residential properties; 65 percent on apartments and most commercial properties; 60 percent for owner–occupied, special-use or industrial properties; and 50 percent on raw land.

The property’s appraisal determines the final value and establishes the lender’s LTV risk. To limit risk, appraisals should be done by reputable, conservative appraisers. Using sales comparables or real estate opinion letters instead of a full appraisal is not recommended.

The exit strategy — or loan repayment — also is important. Find out if borrowers have a realistic repayment plan. Consider whether the loan solves a problem or is just a temporary fix.

The borrowers should write a loan-purpose letter about how they expect to pay the loan and then share this plan with the lenders.

Hard-money commercial lending often is a borrower’s last stop before losing or selling the property. Most lenders will ask for a loan-purpose letter; a completed loan application; current credit report; a property’s year-to-date income; and expenses, pictures and a current title report.

Lenders also may inspect the property and check the comps in the appraisal before funding. Other important exhibits for commercial loans are environmental reports, leases, business licenses and other information for special or unusual loans.

A lucrative market

Originating hard-money commercial loans can be lucrative and can boost your loan origination in a slow market. To increase your funding ratios, put yourself in the lender’s shoes when you prequalify a loan. If you want a loan to close fast, make sure you always give the lender as much information upfront as possible.

Keeping basic commercial hard-money principles in mind will save you, the lender and your clients time and money. The best way to start is to find a mentor who can teach you the basics until you are ready to go out on your own.

The nice thing about hard-money loans is that they usually have a quick close — and you’ll often end up with two loans from one client when it’s time to refinance the hard-money loan.


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