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Investing in commercial real estate is often considered a "safe" source for money. Groups of investors, businesses, insurance groups and others all have funds in the commercial real estate sector, which is generally less prone to fluctuation than residential real estate. However, one of the biggest drawbacks in commercial real estate is that the funds become locked for an indefinite period and without unloading the property (often for much less than face value), there is no tangible way to access the funds.
Banks are notoriously slow to lend against commercial properties. This is typically due to their enormous valuation and thus required investigations and processes. But, there is an alternative that can work well for many commercial property owners seeking a lien against their holdings. It's called hard money or sometimes a "bridge loan".
Hard money is a term used in the commercial finance sector that refers to alternative lenders that offer loans against a commercial property, usually for a short period at a higher interest rate. The cost of these loans may be higher than a bank, but many deals can close in under 2 weeks and be re-paid when a bank loan comes through without losing money to pre-payment penalties. The uses for hard money loans vary, but frequently include funding loans for capital expenditure, the purchase of a property, refinancing or simply cash for continued operations.
Hard money lenders aren't easy to find and the field is filled with disreputable brokers and lenders who make promises they cannot back up. This is largely due to the lack of regulation on the industry - alternative commercial real estate lenders have very little oversight from the government. This curse is also a blessing, though. The right lenders can provide relatively low rates (only 5-7 points higher than a bank) and can close deals quickly and ignore credit problems or past bankruptcies from the borrower as long as the loan makes sense.
Several hard money lenders fund nationwide, while others are relegated to a particular state or two. The key to finding the right lender is to ask for references, use directories on the web and shop competitively. When you find a lender who's friendly, understanding and seeks to work with you - proceed with caution. Remember that no lender should take money "up front" without first providing a "term sheet" - an agreement that says the lender will fund your loan as long as their investigations reveal that your estimations and claims were true.
For commercial property owners or buyers, hard money can be a savior. Be cautious, use disgression and you may be able to close deals that you previously thought were impossible. |
