Avatar's Blog

Hard money loans are a reasonable alternative to conventional bank loan in certain circumstances. When should you consider a hard money loan for real estate purchase or refi?

1. If your credit score is too low to meet conventional bank requirements to obtain a mortgage, consider private alternatives, known as hard money loans
   
2. If the property does not meet conventional lender requirements for a mortgage, consider a hard money bridge loan. An example of such a property might be an apartment or office building that does not have an occupancy permit.
   
3. If your purchase or refinance needs to be completed in a matter of days or weeks, consider a private lender, as conventional lenders regularly require several months to complete due diligence and fund a commercial loan.

Hard money commercial bridge loans are designed to bridge the gap from whatever circumstance exists today and a future date, usually not exceeding 36 months' time, when you will be able to refinance conventionally or take out the bridge loan in some other way. Plan ahead. Hard money lenders will want to know your exit strategy for their loan before funding.

Avatar Financial Group specializes in funding hard money bridge loans for income producing properties in the US. We do not fund land or construction. If you have improved land - platted, permitted, etc. - and want to build homes or other strcutures on it, you need to locate a construction lender. However, if you have a construction project underway, if it is already at least 80%+ complete, Avatar may be able to assist you with a loan to pay off the construction lender and complete the project.

If your property has very little building structure compared to land, Avatar may not be the right lender for you, unless that property is income producing, such as parking lots, golf courses, ski resorts, mobile home parks, RV parks, etc. While the strcuture to land ration is very low on those properties, they are income producing and can support the loan. A hard money loan will often make good sense for the owner of such properties.

A good rule of thumb to know is that Avatar makes loans that make sense for the borrower as well as for the lender. We charge reasonable rates such that all parties can reasonably benefit from the transaction. If your property can support the monthly payments and you have a reasonable exit strategy for the loan, make a loan request on this website by selecting the loan link on the home page. 

Avatar Financial Group funds hard money commercial bridge loans. A bridge loan is a loan that spans a short period of time and 'bridges' a gap between now and approximately 12 to 36 months at which time the loan comes due in full.

If you are seeking hard money because your credit scores prevent you from obtaining a conventional loan, you can list 'clean up credit and refi' on your loan application. This is perfectly fine, but you have to have a clear plan in place to do that. Can you afford to pay off debts with the proceeds of this loan and then negotiate with lenders to assist you in clearing your credit scores? Will you hire a professional to 'clean up' errors that are currently preventing you from obtaining a loan?

Will you sell the property and repay the loan that way? Are you simply in a hurry to complete a sale and already have long term financing underway as you accept the hard money loan?

Whatever the reason for obtaining this bridge loan, recognize that the loan will come due within 36 months at the outside and prepare immediately for refinancing. With the best of intentions, it often takes much longer than expected to clear credit issues, prepare a building/property for commercial bank approval, or sell a property. On your loan application, show that you ready to move quickly and efficiently to complete your exit strategy in a timely manner.

Brokers and direct borrowers alike would do well to learn more about the proper preparation of business P&Ls. Hard money lenders base their lending decisions on the answers to three questions

1. Does the subject property have sufficient collateral to serve as collateral for this loan?
2. Can the borrower afford the monthly payments?
3. Does the borrower have a reasonable and attainable exit strategy that can be accomplished within 36 months

The second question is determined by a careful reviwe of the P&Ls (Profit and Loss Statements) of the entity that will support the monthly loan payments. When preparing this document, you will financial information from the prior year and the each month to date for the current year. You will need to know the amounts spent by company, organization, or other entity broken out into details, including, rent, utilities, cost of goods, maintenance, salaries, taxes, loan payments, etc., etc. You will need to list income from all sources, also broken out into detail such as product sales, service contracts, etc. or perhaps, room rentals, events, catering, gift certificates, restaurant, bar, greens fees, etc.

A P&L that contains 'gross income' and 'expenses' and a net figure without further detail is not acceptable. An annual figure for the past year may be acceptable, but the year to date should show the monthly income and expenses precisely. If you have 'seasons' it is best to show a monthly accounting for the previous year as well as the annual report, so the lender is able to determine whether you are doing as well as or better than last year at the same time.

Finally, look at the results of your own P&Ls. The lender wants to see that you are making enough money to pay all your expenses, including the Avatar loan (less the payments you make today for loans that will be paid off by the Avatar loan). You should have a ratio of at least 1.2 : 1 of income to expenses in order to be able to 'afford' the payments. If you run 'tighter' than that, you may not be able to afford any unexpected expenses that may crop up along the way. Your P&Ls should provide a clear picture to you as well as to the lender as to whether this loan makes sense for your business today.

As an institutionally funded hard money lender, Avatar Financial Group can close a loan in as little as two weeks. In truth, most closings take 3-4 weeks to complete from the time a Letter of Intent is issued. Why?

About 10 - 20 documents must accompany a closing of a hard money loan. They range from two year's tax returns on the guarantor to title, survey, rent rolls, recent corporate financial statements, a short paragraph describing the use of funds, etc. All these documents must be signed by the borrower / guarantors. What holds up most closings is not the lack of documents themselves, but a lack of the required signatures on them.

Be sure you are ready for closing - all guarantors should sign all the documents before mailing them to Avatar. If a document does not need a signature, there's no harm in the fact that it is signed by all parties. But if a document is missing a signature, it can stall a closing one, two, three or even more days! Tip: Everybody signs everything! Make your documents look like the Declaration of Independence - signatures everywhere! Your loan will close promptly and you'll be glad you did.

The value of property lies in its ability to be sold. For hard money lenders, in the event of a loan default, the property must be sold quickly. So the value of property is closely tied to the number of uses it might have, which directly increases the number of potential buyers for the property.

If you have a commercial or industrial property you wish to collateralize for a hard money loan, cxonsider the uses the building might have. For example, a very savvy broker told me today that he is representing a group which owns a Legion Hall built about 10 - 20 years ago. The ceiling, he noted, is a drop-ceiling. The space is large and undivided by solid, non-moving walls. Therefore, he told me, if a manufacturer wanted the building, he could easily remove the drop-ceiling and make use of the property for manufacturing or storage.

Consider the special elements of the building you are collateralizing. Be sure that Avatar's appointed appraiser knows of them and understands how they will increase the potential uses for your building. This will increase the value, which may increase the size of the loan you are able to obtain.

On every owner occupied commercial or industrial refinance that Avatar funds, somewhere in the documents, I note the words, "pride in ownership." These powerful three words are used describe the condition of the building occupied by a company who is using the asset to generate working capital on short notice. For a business, the ability to use the plant or office to generate working capital when you need it most can be a life saver.

In times like these, when money is needed in a heartbeat, the last thing on anyone's mind is whether there are flowering shrubs out front, whether the lawn is mowed, or perhaps evern whether the bathrooms are cleaned and scrubbed. But, ironically, it is the attention to those details that can help get a deal funded. If a building is and looks well maintained, which includes landscaping, as well as cleanliness in all areas, from broom closets to bathrooms, and the working floor, hard money lenders are going to be more likely to make the loan.

Naturally, cleanliness and posies out front do not replace the need for strong financial backing, including financially capable guarantors, P&Ls indicating a current ability to afford the loan, and past financial data proving the 'story' and identity of the owner, as well as hard facts concerning the value of similar properties in your location. But, when things hang in the air, the lender is busy and must choose which projects to look at first, etc. having a building that can be described as demonstrating 'pride in ownership' will be an invaluable asset.

Clean; plant, paint, mow, change out the light bulbs, etc. Pride in ownership will improve more than your chances for a hard money loan - it will improve morale and dedication in your staff and may reduce on-the-job allergens and sick days, as well!

Many new businesses find it difficult to obtain a loan from a conventional lender. If the principals of a new business own real estate, they may be able to collateralize the properties to generate the working capital needed for start up. Commercial properties, residenital properties and more have been used.

If you are considering collateralizing your residential property for a hard money business loan, put the property into a corporate entity before even requesting the loan. You can establish a new entity or use the business entity. Many people prefer to separate the property from another business by establishing a new corporate entity to hold the real estate. Establish a fair market value for rent and pay it. Keep books. Know that if the sole reason you are establishing an entity and transferring the property is to obtain a loan an circumventing the residential mortgage loan restrcitions, your loan will  be declined. It's not the lender that declines the loan - it's the law.

So prepare in advance to be abel to generate capital for a new business. Consult with a business lawyer or business financial mentor, such as those provided by the SBA and other local business support groups before making any arrangements. The experience of seasoned business owners can be invaluable and you should always have competent legal advice before making decisions about property, real or business.

If you are purchasing property, you will need to get clear title to the property in order to close the deal. If you already own the property, you got that title and a survey when you closed the deal. Find those documents. You will need to obtain a new set, current and signed, for the Avatar hard money loan you are requesting.

Choose a nationally recognized title company. If you have several choices in your city, ask for pricing - it can vary substantially and there is no reason to pay more than necessary. However, do not choose a title company without asking Avatar if that company is acceptable. Not all title companies are the same - they vary in competency and speed, as well as price. You will need a thorough title and survey to be acceptable for closing - and, like all documents, be sure guarantors all sign them before sending them to Avatar.

Borrowers are sometimes overwhelmed by having to provide P&Ls from last year and this year YTD to a hard money lender. Don't worry. Avatar is not looking for a book of information, but merely a single sheet indicating the income from all sources on a line by line basis and the expenses on a line by line basis as well.

If you are tending well to your business, you will have P&L statements which you update at least monthly. They give you  - and now Avatar - a picture of the financial capabilities of your company. Avatar will remove the sums you are currently paying for any loans that will be paid off by the Avatar loan and will insert the amount you will be paying for the proposed Avatar loan. Your P&L will demonstrate whether the monthly payments are affordable after all other expenses have been paid. Avatar will look to see that you have a few dollars left over each month to put in your pocket as well. This provides a financial buffer in case there is a 'bump in the road'.