Below are some of the most common issues that kill borrower's commercial bridge loans while in process (meaning after the borrower has signed the LOI and sent in money to the lender).
Commercial Bridge Loan - Value Value tends to be one of the biggest issues with commercial hard money deals.
Basically the lenders use a different methodology of calculating value than borrowers or the market in general does.
Normally they use a shortened marketing time frame on appraisal reports.
For example, most appraisal companies will base the typical marketing period at 9 to 12 months to adequately expose and market the property, generating the highest offer the market will bear.
The commercial bridge lender in contrast uses shortened time frame of approximately 3 months to 6 months to sell the property.
What this does is lower the value by 30% or so and further protect the hard money lender's capital in case of borrower default.
What normally happens is that borrower turns the deal into a few lenders.
The lenders only have a vague idea of the market and except the value from the borrower.
Or perhaps the just shave 20% or so of the quoted value, and issue their term sheet.
The borrower accepts the term sheet and the file starts to move through underwriting.
Value is ordered, and after the report comes back to the borrower, the bad news is given that the value came in 40% lower than what the borrower felt the property was worth.
How can this be???Let me give you an example.
We recently worked on a file that this happened, despite all of our efforts to avoid issues like this.
The borrower felt his property was worth $2,900,000.
We didn't really believe the lender would agree with that, but they we're only asking for $1,100,000.
So we were confident this wouldn't be an issue.
The loan to value was strong.
What we didn't realize was that the property was on 5 acres, which was an excessive amount of land for a 7,500 square foot building.
The appraisal report gave a $1,600,000 for the building and one acre (which is what all of the comps supported), and $1,100,000 value for the other 4 acres.
The lender would not consider the other 4 acres, for several reasons (it was mostly "unbuildable" and most hard money lender will not lend against land).
So, the lender would go up to 60% loan to value of the $1,600,000 which was below the borrowers existing balance.
Dead deal.
Commercial Bridge Loan - Wrong Lender to Begin With This is an unregulated industry and many lenders will charge a flat fee to lock borrowers up of approximately $15,000 at signature of the term sheet.
Many of these lenders are just being unscrupulous.
Many do fund deals, but are overly "ambitious" on the front of the loan.
Meaning that they say that they can get it done, when in reality they think they only have a small chance of getting it done and they know it.
So they encourage the borrower to move forward, get the fee and order the appraisal (or other reports).
When the value comes in short, or title issues pop up, etc they give the bad news to the borrower that the deal is dead and they keep the remaining deposit.
The best way to avoid this situation is to get an unbiased third party referral on commercial bridge lenders.
Talk to your CPA, Attorney or commercial mortgage broker (like us).
Make sure that they have worked with the lender they recommend.
When working with a broker, make sure they are experienced.
Also, a good broker should know which lenders to avoid and which are actively funding deals.
Commercial Bridge Loan - Value Value tends to be one of the biggest issues with commercial hard money deals.
Basically the lenders use a different methodology of calculating value than borrowers or the market in general does.
Normally they use a shortened marketing time frame on appraisal reports.
For example, most appraisal companies will base the typical marketing period at 9 to 12 months to adequately expose and market the property, generating the highest offer the market will bear.
The commercial bridge lender in contrast uses shortened time frame of approximately 3 months to 6 months to sell the property.
What this does is lower the value by 30% or so and further protect the hard money lender's capital in case of borrower default.
What normally happens is that borrower turns the deal into a few lenders.
The lenders only have a vague idea of the market and except the value from the borrower.
Or perhaps the just shave 20% or so of the quoted value, and issue their term sheet.
The borrower accepts the term sheet and the file starts to move through underwriting.
Value is ordered, and after the report comes back to the borrower, the bad news is given that the value came in 40% lower than what the borrower felt the property was worth.
How can this be???Let me give you an example.
We recently worked on a file that this happened, despite all of our efforts to avoid issues like this.
The borrower felt his property was worth $2,900,000.
We didn't really believe the lender would agree with that, but they we're only asking for $1,100,000.
So we were confident this wouldn't be an issue.
The loan to value was strong.
What we didn't realize was that the property was on 5 acres, which was an excessive amount of land for a 7,500 square foot building.
The appraisal report gave a $1,600,000 for the building and one acre (which is what all of the comps supported), and $1,100,000 value for the other 4 acres.
The lender would not consider the other 4 acres, for several reasons (it was mostly "unbuildable" and most hard money lender will not lend against land).
So, the lender would go up to 60% loan to value of the $1,600,000 which was below the borrowers existing balance.
Dead deal.
Commercial Bridge Loan - Wrong Lender to Begin With This is an unregulated industry and many lenders will charge a flat fee to lock borrowers up of approximately $15,000 at signature of the term sheet.
Many of these lenders are just being unscrupulous.
Many do fund deals, but are overly "ambitious" on the front of the loan.
Meaning that they say that they can get it done, when in reality they think they only have a small chance of getting it done and they know it.
So they encourage the borrower to move forward, get the fee and order the appraisal (or other reports).
When the value comes in short, or title issues pop up, etc they give the bad news to the borrower that the deal is dead and they keep the remaining deposit.
The best way to avoid this situation is to get an unbiased third party referral on commercial bridge lenders.
Talk to your CPA, Attorney or commercial mortgage broker (like us).
Make sure that they have worked with the lender they recommend.
When working with a broker, make sure they are experienced.
Also, a good broker should know which lenders to avoid and which are actively funding deals.
Source...