In order to obtain a hard or private money loan, the prospective borrower must let the investor know how the loan will be paid off by the end of the term. Hard money lenders do not want to own the property they are lending on. They do not want to go through the expense or the headache of foreclose; rather, they want to make monthly interest money off their investment in asset-secured loans. The Private lender will want to be assured that the borrower has a plan to pay off the loan by the end of the term before the lender will agree to fund it.
It is a good idea to troubleshoot the various exit strategy options with your hard money broker. An experienced private money broker can also give advice about any holes that are in the payback plan.
Hard money loans typically require repayment by the borrower within one to three years. They are a short-term borrowing aid, not a long-term funding solution. There are many different ways to exit a hard money loan. Here are a few of the most common.
- Refinance with a mortgage from a traditional lender. This is the best exit strategy to maintain ownership of the property. The borrower can use the hard money loan to buy the investment. Then perhaps renovate the property to increase the value. The exit strategy, then, is to pay back the hard money loan with a less expensive, long-term traditional loan, based upon the new condition and new value of the property.
- Re-sell the property. If the borrower is only interested in renovating or rehabilitating the property, then the exit strategy will be to sell the property for a profit in order to repay the hard money loan.
- Pay the debt off with business capital. Another exit strategy can be to use money from the closing of other properties or selling assets of value.
Planning an exit strategy requires borrowers to work backwards, starting at the end goal (whether that is ownership, portfolio expansion, or flipping) and working back to the present. It is important for both the borrower and the private lender to know the strategy to retire the loan to ensure that both sides understand and are in agreement about the strategy. Having a logical exit strategy in your back pocket will make you a more appealing borrower to reputable hard money lenders.
At Cushner Capital, we believe that a strong exit strategy can help explain how these motivated borrowers will fulfill their promise to the hard money lender. The down payment or equity and the title insurance are the key ingredients, but the exit strategy is also a vital piece to the hard money lending puzzle. Call us for quick fundings at affordable rates.