Avatar's Blog

Avatar Financial Group fields several hundred loan requests every day. Some are from borrower seeking to purchase or refinance private residential properties. Hard money loans are bridge loans designed for commercial purposes. If you have a comemrcial, industrial or investment residential property you wish to purchase or refi, Avatar may be able to assist you.

If you need to fix up your current residence, your first stop should be your local bank with whom you already have an established relationship. A line of credit will be the fastest and most cost effective option for many homeowners.

Contact Avatar for commercial bridge loans in excess of $500.000. We can lend up to 65% of the current selling price of commercial real estate.

Hard money lenders want to know how you will make the monthly payments. Since the payments are interest-only and the loan has a term of about 1-3 years, the lender also needs to know how you will pay the principal back, called your exit strategy.

Tell the lender all the good news about your plans. Keeping info back leads to swift and early-stage rejections. Hard money and commercial bridge lenders field hundreds of loan requests per week. Almost all of them are not qualified to receive a loan. Many are submitted by potential borrowers who have not thought out their plan, business process, or how the real estate loan will fit into their plans.

Borrowers who have 20% cash to buy a property and know the cost of the 65% loan, as well as the costs of the subordinated second loans (usually, but not always, a seller carry back loan) have a far better chance of receiving funding.

Put your business plan on paper. Run numbers that show you and the lender how much you will gross each month, how much you will need to spend on expenses - including the loan - and how much you will have left over each month. This will demosntrate your business capabiltiies and your ability to pay the loan. Lenders don't want to lend to amateurs who are not willing to put in the time and effort to work at a business like a professional. Professionals run the numbers and keep track of their expenses. They know what they can afford, which loans make sense and which don't.

Hard money lenders such as Avatar Financial Group ask for a down payment toward the costs of due diligence at the time a borrower signs a Letter of Intent and Term Sheet. Where do these funds go?

Due dilignce is the process of determining the validity of the statements made by a borrower concerning the subject property, the borrower's finances, etc. In that process, lenders take a look at the financial information provided to determine the veracity of the information provided. They may ask for tax returns, signed P&Ls, and more. Lenders will value the subject property using past appraisals, tax values, business use valuations, and other means. The valuation will be based on the quick-sale value of the property. A site visit to the property by a represenatative from Avatar is part of Avatar's due diligence process. Finally, there are costs for legal and escrow work.

Avatar uses due diligence down payments for third party costs only. They do not keep these funds. Points, loan origination/processing fees, etc. may be part of the loan, but these funds are never collected upfront before the loan closes.

The quick sale value of a property is the amount it can be sold for if the seller must recoup their investment (money) in a property quickly. Different than an appraisal value, the quick-sale value will take into consideration the likely number of buyers for such a property, the potential uses for it, the value of the business on an annual basis if the property is business-specific, such as a hotel.

For a hotel, for example, take the net income per year and compare it to the reasonable expectation for return on investment by a buyer. If the buyer will run the property on a daily basis, the buyer will want to see a 12 - 13% ROI.

If the buyer can purchase a building and simply rent it out to stable tenants over a very long period of time, the personal time expense requirement is much less. In that event, the buyer may look at a 7-10% ROI as reasonable.

Appraisals are necessary to obtain a hard money loan, but they are not the appraised value hard money lenders will use as the basis for the loan. Now you know why.

Hard money lenders, Avatar Financial Group included, make their lending decisions based on three critical factors:

• How will the borrower meet the monthly payments?
• how that your income generated from the property or business in question can generate enough monthly income to meet all expenses, including the Avatar loan. Hard money lenders like to say a 1.2:1 ration of income to expenses.
• What is the exit strategy for the loan?
• Show that you have a workable plan to refinance or repay the loan within three years.
• What can the property be sold for on a quick-sale basis?
• Distinctly different from an appraisal (although appraisals are also valuable information), the quick-sale value of a property is what lenders need to use when valuing your property. In the event the loan cannot be paid back, the lender must sell the property quickly to recoup the funds loaned.

Avatar Financial Group offers interest-only payments on hard money loans. The monthly cost of a loan with a 12% interest rate is 1% of the loan total per month. Current rates at the time of this writing are prime + 6.99% or about 12.5%. Points and closing costs (with the exception of due diligence costs) can be wrapped into the loan. Account for that in your calculations when determining the monthly outlay.

Avatar and other hard money lenders like to see a 1.2:1 income to expense ratio. This ensures that the borrower will have sufficient funds to operate, pay expenses, including the Avatar loan, and still have a profit at the end of each month. Avatar makes loans that make sense - for the borrwer as well as the lender.

Avatar Financial Group does not fund land (improved or raw) or construction loans. However, we have made loans that generated the capital required for construction. For example, Avatar funded a newly constructed church in Texas. The congregation used that loan to complete the construction of a community center. Their plan is to operate the community center and pay back the loan by refinancing both the church and community center through conventional loans in the near future.

By collatreralizing properties that are already built, you can generate capital to build new projects. Count on your property being able to generate 65% of its current selling price (quick sale value). You will need to pay off any 1st lien loans and/or have other liens subordinate to the new hard money loan.

Avatar Financial Group can fund real estate purchases and refinances for companies that occupy their own building. We do not need the property to be income producing to fund it. In the event that you occupy your own commercial or industrial building, Avatar will use the P&Ls from your business to determine whether you can afford the loan - whether it makes sense for you and for Avatar to enter into the agreement.

Be prepared to show P&Ls for two years, as well as two years' tax returns for the business. The guarantors on the loan should each provide personal net worth statements as well. If you have an income to expense ratio of better than 1.2:1, you should be able to qualify for the loan, dependent on due diligence and the value of the property you occupy.

Avatar Financial Group funds commercial bridge loans (aka hard money loans) that make sense for Avatar and for the borrower. The principals want to see that the borrower entity (company or individual) is grossing at least 1.2 times the monthly expenses. This provides some assurance that the borrower can put a few dollars into his/her pocket at the end of each month and, in the event that a problem arises in the business, they are able to overcome the obstacle and continue to make monthly payments on the loan.

Avatar does not want to put anyone out of business. Avatar loans have to make sense for both the borrower and the lender.

Avatar Financial Group fields more than 100 - 200 loan requests per week. We are able to fund loans in al lfifty states, except Arkansas and Tennessee. These states have usury laws which prohibit hard money lenders from making loans in those states. It is a simple matter of economics. Hard money lenders need to charge higher interest rates in order to cover their costs of business and to accomodate the higher risks associated with loans that conventional banks will not fund.

The states of Arkansas and Tennessee have both passed laws limiting the interest rates which can be charged, thereby preventing private lenders from being able to cover their costs and receive a reasonable return on investment. As a result, hard money lenders do not operate in those states.