By Devorah Benarroch
When it comes to the comparison between conventional bank loans and hard money loans, some might wonder why people would even consider interim financing. Hard money loans are typically short-term loans with higher interest rates and upfront fees, in fact, the opposite of conventional loans. However, hard money loans do have an important place in the real estate market. When traditional financing options are not available, utilizing a short-term hard money loan, a lender like Century Capital Partners may be the best choice to fund a borrower’s quick investment opportunity.
Here are some situations where obtaining a commercial real estate hard money loan makes sense:
A property owner who is also a developer might be considering to build a ground-up project. Although there are many lenders who offer construction financing, each one has their particular niche and lending guidelines. A borrower’s construction experience, credit rating, project presentation, timeline, equity in the project, and financial reserves are some of the factors a traditional lender considers in their evaluation of the loan. Shortfall found in any one, or a combination of these factors, can cause a bank to decline a construction loan application.
Hard money lenders also consider these factors when evaluating a real estate construction project, but the value they put on them can be significantly different. Many times a conventional lender will deny an application if anything is outside their lending parameters; on the flip side, hard money lenders like Century Capital Partners are often willing to explore compensating factors a developer brings to the table.
Furthermore, when it comes to construction projects, bank lenders may place a cap of sixty, seventy, or eighty percent loan-to-costs. In contrast, some hard money lenders who specialize in development projects are known to offer one hundred percent financing (and sometimes more) for attractive projects. Companies offering hard money loans for construction projects are able to modify loan terms that fit a borrower’s needs. As noted, hard money lenders typically charge higher upfront costs and interest rates for their loans. But if a developer’s ROI requirements and profit margin are met, it can be in their best interest to accept the costs of this loan and forgo the risk of using their own funds.
2. Low Credit Rating
Par for the course, conventional lenders rely heavily on the credit worthiness of a borrower in their loan evaluation whereas a borrower lands on the credit scale, which determines the availability of funds, loan terms, and their cost of borrowing.
Conventional lenders make loans, but are restricted by industry guidelines. A borrower’s credit is the cornerstone of a bank’s decision-making process.
Late payments, tax liens, mechanic liens, collection accounts, high debt levels, bankruptcies and foreclosures are all situations that can be credit score killers and reasons for banks to decline a loan application.
Hard money loans are not restricted to the same lending guidelines. Lenders like Century Capital Partners set their own standards regarding the level of risk they accept and how they evaluate an application. Certain alternative lenders (asset-based evaluators) can take any level of credit history. A borrower having bad credit or no credit can still obtain real estate financing through a hard money lender.
3. Stabilizing Property
A real estate investor may need time to stabilize an under-performing property they own. This is a very common situation with commercial real estate properties.
Conventional lenders tend to stay away from providing financing for properties that are performing below market efficiency. The income a property brings may be low or the expenses can be high, relative to the income. These situations would fall outside a bank’s lending comfort zone.
The good news is these are perfect situations to use a hard money loan. There are hard money lenders like Century Capital that focus primarily on the value of the underlying property and don’t take into consideration a borrower’s personal financials or the property financials. With bridge financing, a real estate investor can obtain a loan in order to have time to improve a property’s standing by filling vacancies, increasing rents, and finding other ways to lower expenses.
Once the property is stable, the investor can utilize a conventional lender for the permanent financing.
Hard money loans are not cheap money, but many times they play a necessary role in continuing the movement of the real estate market. When conventional lending is unavailable, optional hard money sources like Century Capital Partners fill a need that is well worth the investment for the purpose it serves.