Hard Money _ Bridge Financing

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Hard Money _ Bridge Financing Powered By Docstoc
					             Hard Money &
            Bridge Financing


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            ! Hard Money Lending
                ! Definition
                ! Appropriate Uses
                ! Tips for Brokers
            ! Bridge Financing
                ! Definition
                ! When appropriate
                ! Tips for Brokers
            ! Mezzanine Funding
                ! xxx
                ! xxx
                ! xxx

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      What is Private/Hard Money?
 ! The definition of “hard money” when referred to in real
   estate financing, is essentially a non-bankable loan.
 ! The name hard money is frequently interchanged with
   “no-doc” or private lending.
 ! For a hard money loan, the underwriting decisions are
   based on the borrower’s hard assets (real estate) as
   opposed to the borrowers credit. Typically LTV’s are
   65% or less
 ! Hard money loans close quickly with little/no traditional
   documentation (tax returns, etc…) that conforming
   lenders require
 ! Pricing is higher for a hard money loan as opposed to
   conventional financing due to the lack of documentation
   and typically lower credit scores

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What is Private/Hard Money? (contd.)
      ! Various products within the hard money arena
            ! Rehab/construction: go on ARV, etc..
            ! Light Doc: some credit scoring
            ! No-Doc: no credit/income, based on as is value
      ! Motivations of the Hard Money Lender:
            ! The majority of hard money loans are held in the Lenders
              portfolio, money is made on the spread between their cost
              of funds and the note rate
            ! Some hard money lenders look at this financing as “loan to

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      When Should a Borrower
      Choose Hard Money?
  !Does not qualify for traditional financing:
   deals that are “out of the box” (have a
       !Borrower credit impaired
       !Time impaired (need Quick closing)
       !Tax issues (real estate, business, etc..)
       !Business turnaround (much cheaper than

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       Tips for Mortgage Brokers
  1.        Learn which lenders offer products that fit the deal
            you are trying to place (not vice versa or
            substantial time will be wasted)
  2.        Fully understand the deal and what the client is
            trying to accomplish with the transaction
       !      How quickly does the deal need to be closed?
       !      Are there are issues with credit, bankruptcies, cash flow of
              the property, title, etc?
       !      What is the story behind the transaction?
  3. Watch out for brokers masquerading as
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      Tips for Mortgage Brokers
 4.       Before submitting a loan ensure that both you and
          the client understand how the entire loan process
          will work (inspections, closing, etc..)
   5. Be wary of large up-front fees. Many lenders in the
          industry charge very large upfront “due-diligence”
          fees prior to issuing a commitment (10-100K
          depending on the deal).
   6. Ask for a formal commitment from the lender that
          outlines all points, prepayment penalties, rates, and
          other fees.
   7. Be wary of lenders that try to pull a bait and switch
          at or near closing. Many lenders will offer a deal
          too good to be true only to change the deal at
          closing. (For example an 8% rate to a client with a
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      Bridge Financing
      ! Bridge financing is utilized when a borrower requires
        cash that can be repaid in a short period of time
        (usually 120 days or less). This financing is secured
        by assets similar to hard money
      ! When is it appropriate to utilize
            ! Borrowers have a property for sale that is under contract,
              they need funds to hold them over until the property sells
              and/or they need funds to complete another transaction
            ! Borrower has firm financing commitment for a long term
              conventional loan, they need funds immediately for business
              purposes until the long term loan is complete
            ! Various other situations where borrowers need cash for a
              very short period of time and are certain that they will be
              able to repay the note within the allotted time

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      Tips for Brokers?
      ! Ensure the borrowers objectives are fully understood
      ! Historically most borrowers need longer than they thought with
        the bridge loan
            ! Bridge lenders need to turn their cash quickly. Steep penalties for missing
              the repayment date for a bridge loan
      ! Just like hard money, understand the upfront fees and timing to
        actually close the transaction
      ! Bridge loans priced very expensively for short term money.
        Borrowers need to factor this into their ROI analysis.
      ! In Fairview’s portfolio we have seen hundreds of borrowers
        state that they will exit the loan within 120 days, over the last 5
        years there is only one borrower that has paid off within the
        120 days.

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    Backup Information

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Hard Money vs. Conforming
      ! Conforming:
            !   Tax Returns, personal financials, etc…
            !   Typically property must be stabilized
            !   Full MAI prior to closings
            !   Credit typically must be high 600s and greater
            !   Typically 6+ weeks closing
      ! Hard Money:
            !   Typically no tax returns, personal financials, etc…
            !   Most lenders can handle properties that are not stabilized
            !   Many lenders can close without appraisals
            !   Most credit scores accepted
            !   Closings in as little as a week (typically 2-3 weeks)
            !   Creative deal structures to fit unique situations

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  Hard Money Underwriting
      ! Evaluate each deal independently
      ! Use two primary methods of valuation
            ! Sales Approach: Can pull comps in most
            counties throughout the country
            ! Income Approach: Evaluate current rents,
            market rents, expenses, and cap rates
      ! Final value based on inspection and the
      two primary methods of valuation
      ! Most lenders value property based on a 60-
      90 day sale (Quick sale)
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  Deal Example: Credit Impaired
            Norfolk, VA Apartment Complex
              ! Borrower’s credit 480
              ! Apartments not operating to
              potential (high vacancies in one
              ! Needed cash out quickly to secure
              another property
              ! Provided a loan of $1.3m
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  Deal Example: Foreclosure Avoidance
            Middleton, OH mini-warehouse
              ! Borrower in foreclosure proceeding with
              current lender
              ! Property not operating to potential due to
              road construction that blocked access to the
              ! Had to close quickly to avoid foreclosure
              ! Negotiated a short-pay of 60k from bank and
              provided $760k loan

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  Deal Example: Foreign National
            Houston, TX Apartment
              ! Borrower foreign national with no
              ! Large tax liens on the property from
              the city
              ! Need cash to pay off tax liens and
              other judgments against borrower
              ! Provided a $2m loan

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  Deal Example: Company Turnaround
            Philadelphia, PA Light Industrial
              ! Borrower’s business having financial
              ! Borrowers credit Sub-500
              ! Numerous tax liens and judgments
              ! Needed cash for working capital
              ! Provided a 600k loan

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  Deal Example: Underperforming Property
            Upstate NY Strip Mall
              ! Strip Mall 30% occupied at time of
              ! Borrower needed cash-out for another
              ! Initially provided 650k loan
              ! Once new major tenant signed up
              provided another loan of 500k for tenant
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