Commercial Hard Money – Hay Day

Commercial hard money is in its “hay day” at the moment. As conventional sources continue to tighten their underwriting guidelines commercial hard money is, for the most part flourishing. Never before have private money lenders been in such a strong position to “cherry pick” deals. In fact, many commercial hard money lenders are raising their underwriting criteria to the point that they match previous conventional guidelines.

Many commercial loan requests that fit the conventional underwriting box 6 months ago, now find that there only viable option is hard money. Borrowers are often shocked and or angry at the terms offered. Interests in the teens with 3-6% points are market. You can’t blame the borrower for being outraged. It just seems ridiculous.

But the reality for many borrowers that have already exhausted all other options, face either losing their property, losing their business (or both) or have to take on a partner. All of these alternatives are more expensive, often much more expensive, than a commercial hard money loan. For example if you have a building worth $2,000,000 with an existing $500,000 loan and are requesting a $1,000,000 loan amount, you’ll pay out $30,000 – to $60,000 in fees vs. losing $1,500,000 in equity. It’s that simple.

Taking on a partner is often thought of as a viable alternative. However, there are many challenges with this strategy as well. First of all you have to find a partner... that has cash and that will blend with the company and your business goals. How much control and ownership of the property and business will you have to give up? The math is as simple as the above example. Give up 50% or pay 6% in fees…

Nobody likes the terms offered. Hard money lenders have much at stake as well and stand to lose millions on one bad deal. Taking borrowers through foreclosure is no cake wake and is very expensive for the lenders, which is a very likely outcome that they often face. Commercial Hard money will likely remain in a very strong position for as long as our credit crisis continues.

Jeff Rauth is President of Commercial Finance Advisors, Inc out of Birmingham, Michigan. He has a STORE for commercial loan brokers. Contracts, spreadsheets, books, etc. Products starting at $4.95! Check it out