Avatar's Blog

Avatar Financial Group offers ommercial hard money bridge loans with interest only payments. Principal, fees and points are payable upon completion of the loan. This serves to reduce the monthly payments to an absolute minimum, providing optimal working capital for the borrower during the period of the bridge loan.

Commercial bridge loans range generally range from 1 - 3 years. Shorter terms can be arranged by contacting Avatar directly. In general, there are no prepayment penalties if the loan is maintained for a minimum of six to nine months. Once again, specific cases should be discussed with Avatar's president and/or CEO directly.

The first of the three basic questions surrounding a hard money loan is the question of sufficient value in the real estate to provide collateral for the loan. In general, Avatar will lend up to 65% of the value of commercial or investment residential properties. The term 'value' is defined as 'today's purchase price'.

If you are buying real estate, the value of the property is the price you are paying for it today. Almost everybody gets a good deal on commercial real estate properties. It is rare indeed for a property to sell for more than the appraised value. It is very very common for properties to sell for less. As with electronics and other retail goods, there is a 'retail price' - in the case of real estate, the 'appraised value' - and there is a 'street value', what the property will sell for today.

In the event a loan goes sour, hard money lenders must sell the collateralized property quickly and efficiently to recoup the balance owed on the loan. They do not have the leisure to wait for the 'right buyer' who loves the property or needs just that piece and who is willing to pay the appraised value price. They must sell within a few months' time. Hence, value is equal to today's purchase price in a purchase loan and to the quick-sale value of the property as determined by Avatar's appointed appraiser in the event of a refinance loan.

The hardest part about starting or operating a business is cash. That statement should easily win me the Understatement Award of the century, let alone 2005. Poor cash flow can shut down an otherwise profitable business more surely than any other business trouble. The problem with starting a business is that it takes capital and no one is willing to lend on a business that hasn't begun. (The days of easy Angel Investment are really over, folks). The problem with a business that has run into cash flow problems is the same - no bank will lend when you need it. You'll need to look to other sources to generate capital.

A little like robbing Peter to pay Paul, look to collateralize what you do have or can get, to generate captial to do or to buy what you cannot get funded for. The first stop is real estate. If you  have some, use whatever equity you have in it to generate capital for other business ventures. If you don't, investing in real estate, fixing it up and selling or renting it out is still one of the surest ways to generate cash. Expect to spend 1-3 yrs to generate a significant sum. Take care of your credit scores along the way. The better the score, the less costly the loans to buy and rehab real estate will be and the more likely you will be able to borrow again later for the business venture you have in mind.

Real estate funding, whether purchase or refinance, whether with conventional lenders or hard money lenders, is not a simple task. There are papers to gather and present, financial documents to develop and review, inspections to prepare for, etc. The one really simple thing is to determine the cost of the monthly loan payments on an interest-only loan from Avatar Financial Group.

Take the total cost of the loan and multiply it by the current prime rate + 7% (12.75% at the time of this writing). Divide that by 12 and you have the monthly payment. It's really that simple. All costs and interest are wrapped into the loan, so ask what the sum total of your loan amount will be and make the calculation. It's nice to know some things are easy in real estate funding!

Hard money lenders such as Avatar Financial Group look at three basic questions when detemrining whether a loan is a good match for the company.

1. Is the value of the property proposed as collateral worth what the borrower says it is worth?
2. How will the borrower make the monthly payments - does the property / business / borrower bring in enough money to cover all expenses, including the Avatar loan and still have enough to put a few dollars in their pocket at the end of the month?
3. What is the exit strategy? Is it clear and workable within the 1-3 yr term of the loan?

The first thing you will need to do is determine the value of the property. If you do not have a recent (within 3-6 months) appraisal on the property, ask a commercial real estate agent what the property would sell for in the event that you needed to sell it within 3 months. Ask two or three agents to get a general range.  In general, real estate agents will give you a slightly high figure. They want your business and they reasonably consider that if they put a rosy glow on the potential for the property if you list it with them, they will have a better shot at our business. So take about 5-10% off their estimate and you have a fairly good working number.

If a similar property has sold in your area, neighborhood, or city - depending on the type of property you are trying to estimate value for - use that to compare with the prices you are hearing from the real estate agents. With a little research, you will be able to determine the quick sale value of your property and plan / budget accordingly. In general, Avatar and other hard money lenders will be able to lend you about 65% of the current quick sale value of the property.

Hard money loans are loans based on the value of real estate and the borrower's equity in it. In general, the reasons people choose hard money loans are;

• they must close a purchase or refi quickly
• they do not have sufficiently good credit to get a loan from a bank
• the property does not meet bank qualifications for obtaining a mortgage
• the business is too tenuous to obtain a loan from a bank

Except for some circumstances surrounding the first reason - timing - for obtaining hard money loan rather than a conventional mortgage, the reasons all indicate an 'out of the box' or out of the ordinary loan scenario. In other words, the risk is greater than a bank is willing to take. Hence, the existence of private lenders. Private lenders use real estate as the collateral for the loan, but they also ask the borrower to personally guarantee the loan as an added insurance. As the risks are often significantly higher than loans made by local banks, it is easy to understand this requirement. In truth, you will find almost all banks require the same personal guarantee for business and real estate loans as well.

When purchasing owner occupied residential real estate, the lending bank tends to front the costs of due diligence. In some cases, the bank 'eats' thoses costs and makes that money back over the course of the loan. Not so with commercial loans

Expect to pay the costs of due diligence up front, before the loan closes. Your hard money or commercial bridge lender should not charge you to look at your loan package - that's like paying for someone to make a sales call. However, at the time Avatar issues a Term Sheet and Letter of Intent, the company president and/or CEO has reviewed your loan package, including photos, financials on the property and your personal financial statement, etc. A determination has already been made to fund this loan, pending the outcome of due diligence. If you have been forthright in your loan package submitted to Avatar, you can be reasonably sure that your loan will fund. This is the time when you sign the Term Sheet and make a down payment toward the third party costs of due diligence, including appraisals, inspections, legal, document preparation and escrow fees. Expect to spend about $5000 for those services.

If you are looking for investment property and want to choose a property with the most likely chance of getting hard money or conventional funding, look for the following:

• Income producing - choose a property with sufficient cash flow to cover the monthly costs of the expenses of the property including the costs of the loan
• Structural quality, pride in ownership - choose a property that shows care has been taken with it in the past and demonstrate that you are willing and able to maintain it in the future. If the property has not been well cared for in the past, demonstrate what you will do to improve the property.
• Future potential - look for properties in neighborhoods that are improving, or that support businesses in a growth industry. Look ahead 2-5 years to see whether this property is likely to increase in value ro any number of reasons.

To determine the number to be associated with the word "Value" in the term "LTV" or "Loan to Value" equation, it is important to understand the concept of 'today's street value'. The short answer for how to determine the value of the property you are about to buy for loan purposes is that 'value' is equal to the price you are about to pay for the property - no more and usually no less.

The reason that Avatar, and other hard money lenders use the purchase price of real estate properties to determine the value for the LTV equation is twofold.

1. In the event that a loan goes sour, the lender must sell the property quickly. The quick sale value of a property is generally at or very near the price it sold for within the past 1-2 years if it has been sold. Everyone buys property at a good price. No one wants to pay more than the appraised value. Appraised values take into account finding a buyer who really has excellent use for the property and may take up to 1-5 years to locate. A quick sale is likely to bring what the property just sold for - what you are paying for it today.
2. For hard money lenders to put their money on the line for a loan, they like to see that all the players in a project have some real cash 'at risk'. The lender, Avatar or another hard money lender, generally has 65% of the purchase price at risk. The borrower must have at least 20% of personal capital at risk. The balance can come from another loan, such as a seller carry back or other subordinated loan. This reduces the likelihood of having the buyer drop off the keys in the event of a 'bump in the road'. Buyers with cash at risk work harder to make a project successful.

Avatar Financial Group lends money for commercial and investment residential real estate. We are able to lend money for owner occupied real estate in the states of Washington and California as well. In other states, if a residential property is owned for business purposes, such as rental properties or other properties occupied by individuals or businesses and held in an LLC or similar corporate entity, Avatar may also be able to fund a purchase.

When determining whether a residential property can be refinanced through Avatar, consider these two critical factors:

• Is the property held in an LLC or other corporate entity?
• Are the proceeds of the loan on this property going to be used for business purposes?