By Kevin Wolfer, president and CEO, Kennedy Funding Financial LLC | bio
Have you ever hit a brick wall with a traditional lender when working with a borrower that has a lingering lien, a property with environmental issues or even a pending bankruptcy? When conventional lenders back away from a deal, hard money lenders are prepared to step in.
Interest rates and fees offered through a hard money lender are normally higher than those available through a conventional bank. For a borrower who doesn’t fit the credit parameters of a traditional lender, however, hard money lenders can be a smart choice. They are willing to focus on the value of the real estate and ultimately work through any problems that exist.
Conventional banks, for example, would not even consider providing funding to an individual with a past criminal conviction. That would likely be the case even if the borrower was not convicted of any type of financial fraud and had done prison time for an unrelated transgression that has no impact on the real estate offered as collateral.
Hard money lenders, however, would consider financing for such an individual, because they are willing to focus on the hard asset and lend based on value — even for borrowers with no income verification or other credit challenges. Depending on the type of real estate, hard money lenders may lend anywhere from 50 percent to 75 percent of the value — typically 50 percent for land deals, and as high as 75 percent for income-producing properties, such as multifamily, retail or office.
Although credit rating is a factor, hard money lenders assess the entire financial picture. Many are concerned with the amount of equity the borrower has invested in the property that will be used as collateral. For this reason, issues on a borrower’s record, such as a challenging credit history, can be overlooked if the borrower has the capital to pay the interest on the loan.
There also are instances where a borrower with perfect credit and no other baggage still chooses to go the hard money route. A well-off Manhattan couple living in a penthouse apartment worth more than $12 million, for example, who do not have any debt on the apartment and are only seeking a loan of $3.5 million, might seem like a perfect candidate for a traditional bank loan.
Why would they be willing to pay 8 percent interest and three points for a hard money loan? In this scenario, because this couple had very little credit history, and all of their income was generated through pensions, the banks weren’t interested in providing the financing. For a hard money lender, a $3.5 million loan on an asset that can sell for in excess of $12 million is a no-brainer. Such a loan could be closed in weeks by a hard money lender.
Large development projects also are in play in the world of hard money. In fact, if many of the necessary approvals for a major real estate development have already been secured, that may be the icing on the cake needed to land a hard money loan — because such approvals can significantly increase the value of a property. Many banks will only look at the purchase price, but hard money lenders focus on the property’s value and the fact that borrowers are often able to enhance that value by obtaining zoning and density changes or getting other necessary regulatory approvals in place.
The one thing traditional financing and hard money loans have in common is that honesty matters. Commercial mortgage brokers have to ensure they are aware of all the facts related to a property and the potential borrower. Hard money lenders will look past many issues as long as there is transparency.
For most hard money loans, borrowers are usually responsible for any environmental toxicity or contamination found on the property — particularly with rural, industrial or commercial land. That’s why it’s important to have a Phase I environmental assessment completed before purchasing any such property to determine whether there are environmental issues — such as contaminated soil, extensive mold or polluted water sources.
This step also will help brokers spare their clients potentially costly, protracted cleanups and legal liability. A professional environmental assessment is typically performed by an environmental engineering company according to standards set by the U.S. Environmental Protection Agency.
If a hard money lender is aware upfront that there are judgments or liens against a property or borrower, or that there is pending or existing litigation, it is not necessarily a deal killer. As long as these facts have been disclosed to the lender, and the results of subsequent judgment and lien searches are consistent with what has been disclosed, there is a good chance the financing deal will move forward. Hard money lenders, however, do not like to be surprised during the due-diligence period, particularly if a borrower has previously assured that there are no issues.
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Every single hard money deal stands on its own. For these lenders, nearly any deal is possible, so long as there are assets involved that have value. There is usually a way to creatively work through the issues to determine how to complete a loan that makes sense for the borrower.
The bottom line for hard money lenders, however, is that borrowers, their consultants and brokers are fully transparent about all of the circumstances that might affect the deal, so that the lender is in the best position to find a loan solution that works. Hard money lenders typically are positioned to find a way to creatively work around many issues that conventional banks won’t touch. Feel free to give me a call for more information!
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