Getting Funded With a Hard Money Commercial Mortgage Loan

Conventional financing through traditional lending institutions, such as commercial banks, Wall Street brokers and major insurance companies, is becoming very difficult to find. Banks and other conventional lenders have tightened their lending standards significantly and are caught up in the credit crunch. In many cases they can't make a loan even when they want to.

There is a very severe lack of liquidity in the major financial markets. One consequence of the banking crisis has been that more and more commercial real estate investors are turning to private, often called "hard money" lenders. Hard money commercial mortgage loans have become a primary source of funding for property owners, investors and developers all over the country.

Borrowers are finding that private lenders are highly professional and very responsive. Private lenders can fund good deals very quickly, sometimes in just days, with less paperwork and documentation requirements. Hard money lenders tend to lend based on the equity in a property; private loans are not credit driven. Many private lenders are "portfolio lenders" who hold the mortgages they write in their own loan portfolios. They are not dependent on the secondary mortgage market and have not been paralyzed by the current problems in the banking system or the bond markets.

Private lenders can be small but some are huge and have more cash-on-hand than many federally chartered banks. Often hedge funds and private equity firms act as hard money lenders, making loans against quality commercial property for the benefit of their investors. In some cases private lenders are wealthy individuals who are looking for higher returns on their funds than banks and government bonds can offer them.

In most cases private commercial mortgages are short term loans that mature in 36 months or less. This makes private money ideal for use as bridge financing while a conventional, longer term loan can be lined up and closed.

Banks are saying no more often than they are saying yes now-a-days. Even good projects and quality buildings are being turned down for financing due to the credit crisis. Rather than let a deal die, commercial real estate investors are taking advantage of private, hard money loan. The rates and points are higher but, unlike banks, Wall Street and the other big players, private lenders have money to loan. Private lenders make their own lending decisions and don't have to consult with distant loan committees or worry about the bond markets. Hard money lenders are making deals and closing loans even in the midst of this very serious financial crisis.

It is possible that in a year or two our credit problems will be behind us, but in the mean-time private lending may be an investor's best chance to get a deal financed.

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Is Transactional Funding Really Necessary?

Much has changed in the ability of investors to complete short sales and REO (Real Estate Owned) purchases when funding is needed to complete the buy side of the transition. The homeowner/seller or asset manager/seller wants to cash out of the property and move on his way. The purchasing investor wants to buy the property but not use any of his own money to do it -the dilemma becomes can an investor make money without having any money?

This transaction is called an "A" to "B" sale when the seller ("A") sells the property to the investor ("B"). However, there is no profit in just buying properties, only when they are re-sold as quickly as possible for a profit. I understand that some investors buy to rent but the return of their money requires a long time to get back. The average investor can't make a living getting an extra $500/month income by investing $70,000 at a time.

So the "B" investor-owner of the property must re-sell the property to another buyer, here designated as "C". The transaction will end up looking like A sells to B who sells to C and all in the time frame of a couple of hours in one day. The investor (B) will hopefully walk away with a profit and A will be out of his headache property and C will be the new owner of the property. Literally, this transaction has been done for hundreds of years.

However, in the past few years, the lending institutions have made catastrophic business decisions such as their sub-prime lending debacle, targets of mortgage fraud, and to make things worse - a severely declining real estate market. So now many of the usual and customary transactions that investors used for years have come under scrutiny and are no longer allowed, sometimes by state and federal law, but most often by policy changes at the lenders.

Transactional funding of a closing for a few hours, or simply putting up the money for the A to B leg of the closing transaction, has become very common when it is necessary to overcome the problem of the B to C leg being funded by a conventional lender. Conventional lenders are banks, FHA (Federal Housing Administration, FNMA, and Freddie Mac as examples. Lenders don't like using their money so real estate investors can make a profit on the "flipping" of a property. The funding of the closing between B and C by using the lender's money to fund the purchase from the original seller has been deemed to be illegal and is being prosecuted nationwide.

The solution is to use the transactional funder's money to buy the property and re-sell it to the end buyer. The investor now has money in the deal and so avoids the no-money illegal nature of the transaction when he re-sells to the end-buyer to get his profit. The cost to borrow the transactional funder's money for a few hours is usually two percent (2%) of the gross amount borrowed plus fees. For a $100,000 loan, these costs could be $3,000. If the investor's potential profit in the transaction is large enough, it's a good deal, if not large enough, he can't close the transaction.

If the end buyer is a cash buyer, some closing agent will still require the investor-buyer to have money in the escrow account to close. But it generally is not illegal to use a cash buyer's fund to close the A to B leg of the transaction. If the closing agent tells you it is, ask him why if you are going to do a double or simultaneous closing. It is probably more likely a policy decision on his part or his title insurance company.

Before you get all the way to the closing table and can't close, consider this alternative to buying the property. Instead of putting the property in your name or an entity's name, put it in a land trust - and designate this buyer on the original Purchase Contract. Have your end buyer come to the closing and bring a cashier's check for the amount due on the HUD-1 Statement and another check for your profit. At the closing, use his money to buy the property in the land trust and you immediately transfer the land trust to the end buyer by transferring the trust's Beneficial Interest to him and immediately resigning as Trustee.

There are other "Last Minute" transfers at the closing table such as a Quit Claim Deed or Limited Warranty Deed but these will require additional costs. In any of these cases the end buyer must be in the informational loop and understand the entire transaction before the closing. One last hint, get additional title insurance for the actual purchase price the end buyer pays for the property in case of a title issue later. Your closing agent should gladly cooperate since he gets 70% to 80% of the title insurance fee as a commission.

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