Avatar's Blog

Commercial hard money bridge lenders, Avatar Financial Group being no exception, require that borrowers have a minimum percentage of equity in each project. Usually this number is 20%. If you are purchasing a $1,000,000 property, expect to put down $200,000 in cash or other collateralized real estate.

If you don't have the cash to put down, you can meet this requirement if you own other real estate. Take a look at the hypothetical scenario below to see how it might work:

purchase price of subject property              $1,000,000
value of additional real estate you own         $1,000,000
TOTAL real estate to collateraliz                 $2,000,000

65% Avatar Loan                                       $1,300,000
You must pay off a lien on the add'l property -$300,000
Your loan proceeds                                     $1,000,000

Commercial real estate loans can take months to consumate when you work with a conventional mortgage lender. If you need to purchase a commercial or investment residential property quickly and need to close in just a few weeks, look to a "hard money" or "commercial bridge" lender to make it possible.

Avatar Financial Group has documented its "ready to fund" timing at two weeks or less. The critical factor in closing quickly lies in having all your documentation ready for the lender ready. Documents will include such items as inspections of the property, financial statements for the borrower(s) / signator(s), corporate entity and resolution documents, use permits, etc. Contact Avatar for a complete list of documents required for closing at gillian@avatarfinancial.com

In some instances, Avatar is able to fund a residential loan.

• If the property is rented out
• If the property is used for commercial purposes
• If the property is held in an LLC or other corporate entity and the proceeds are used for business purposes
• If the property is owner occupied and located in WA or CA

All residential loans are subject to the same $500,000 minimum and 65% maximum LTV lending criteria.

Avatar Financial Group funds loans that make sense for the borrower and make sense for the lender. Therefore, they look for signs that the borrower is able to afford the loan and prosper, as well as pay back the loan in a timely manner.

Avatar looks at the P&Ls for the property / business / borrower to see that the income to expense ratio is at least 1.2 : 1. This means that the borrower is bringing in at least 1.2 times the amount s/he must spend on expenses. This buffer says that the borrower is putting a few dollars into pocket each month and, in the event of a "bumo in the road", will be able to get over the hurdle, rather than fold under the pressure. Avatar wants to be a responsible lender, not a property owner or real estate seller. Avatar funds loans that make sense for all parties concerned.

In order to make an initial determination on a loan (called "issuing a Letter of Intent and Term Sheet") Avatar Financial Group needs to see a Profit and Loss statement for the business entity or entities involved in the transaction. This will include:

• Rent rolls from a building where units are rented out - get them from the seller if you are buying the property
• P&L for the past 2 years if a business will "owner occupy" a commercial building
• P&Ls for the company that will own the new property if the property will remain non-income producing

Avatar will also want to see a 1003 - a form that provides a standardized Net Worth Statement for the borrower(s) who will be responsible for the loan. You can get this form from the website at: /pdfs/Avatar%20Loan%20Document%20Packet.pdf

Parden the pun... it's Oscar season. Like any production in which the audiences opinion makes or breaks the deal, hard money loan packages should be developed and packaged to appeal to the lenders who will review it and let you know if you 'win' the big prize - the loan you are seeking.

Packaging your loan may take the expertise of an expert broker. Brokers charge for their services, generally by taking 2-4 pts (each point equals 1% of your loan in dollars) when the loan closes. Naturally using a broker will cost you more. However, if you can't create and collect your financials, photos, and executive summary in an acceptable manner, the value of a reputable, successful broker can be easily measured in the thousands or millions of dollars you will realize because your loan is funded.

Here's the tip - if you do not write well, do not know direct lenders (naturally, you know at least one - you are reading this tip at www.avatarfinancial.com) are not sure if your financials present a complete and favorable picture, seek out a good broker who can demonstrate that she or he can he do the work for you. Do not use a broker who merely finds lenders for you. That's easy. Use one who knows how to help you put together a package and demonstrates success in getting others funded. Ask for references.

When selecting investment properties, many investors look at the long term potential for the land (location) of the property as an important issue. I would not disagree: the three most important things about real estate are location, location and location. However, that said, it is important to note that if you want a hard money loan (or any
other commercial loan) for the property, whether it be for the purchase or a refinancing in the future, you will do well to consider the monthly cash flow for the property as well.

Simply put, it is better to purchase a property with a continuing, reliable monthly cash flow than to invest in the raw land if you want to collateralize it against a loan. If you are able to pay outright for the property, purchasing a large vacant lot may pay off when the area is ready for a new shopping center or other growth that brings
good offers for the purchase of your property. However, if you need a loan to buy it or want to collateralize in the future before selling it, consider a smaller lot with an income generating business, apartment building, SFD or even a parking or storage lot on it. Lenders consider the income of the property as a primary concern when valueing the property and considering the amount of the loan as well as the rates they will charge.

The Federal Reserve Rate, which technically refers to the interest rate set by the Fed for banks lending money overnight to one another, controls many of the interest rates in the U.S. Hard money is specifically tied to the Fed Rate because hard money is a type of secured investment. Unlike residentail real estate loans, hard money is tied up with securities and investments and is therefore directly related to how much an investor could earn in another endeavor.

For the current Fed/Prime Rate, use the link on Avatar's home page to RealEstateJournal's published rates. These come directly form the Wall Street Journal.

Accompany your loan request with a clearly written executive summary. Sweat the small stuff - make sure you have spell-checked and looked it over for grammatical errors. Poorly written executive summaries are an indication of amateurs who don't know what they are doing. Lender will shy away.

Here's what to cover in your executive summary:

• Decsribe the property you are buying
• How much will you pay for it
• Where will your 20% minimum payment come from?
• Will the seller be carrying back a loan? How long? What rate?
• Why are you buying the property - why is this a good deal?
• How will you make the loan's monthly payments?
• How and when will you pay off the loan in full (exit strategy)?
• What is the income from the property?
• What else does the lender need to know?

If you are collateralizing an industrial or commercial property you already own, you may not think of a spring cleaning as an advantageous activity before asking for a hard money loan. Do not be deluded! Hard money lenders and conventional bankers alike want to see that the property will be well cared for. Here is a list of the most advantageous ways to present your property to its best advantage:

• Paint
• Plant / mow the grass
• Plant shrubs, trees, flowers.
• Put up a sign - or clean/paint exisitng signs
• Add lighting - the brighter the better
• Clean - filth is one of the biggest reasons for hearing 'no' on a loan request
• Straighten up and throw out the trash. Garbage on property is a BIG concern for lenders!