Avatar's Blog

Funny thing. Hard money lenders are a little like home buyers. They like to see that the place looks nice.

If you are looking for a commercial loan based on the equity in your real estate, whether from a hard money lender or the local bank, spruce up the place before taking photos and sending in your request.

Lenders look for something called 'obvious pride in ownership.' It is actually listed as a reason why a loan is approved in the closing documents! 'Pride in ownership' translates to a property that is likely to be well cared for by the borrower during the course of the loan. It is also an indication that the borrower cares enough about the property not to let the loan lapse, thereby losing that property to the lender. Lenders do not want the property - they want to lend money, get a reaonsable return on their investment and go on to the next deal. If they get the property back in a foreclosure, they are in the real estate business, trying to sell the property. And their money is tried up until it is taken care of.

In the last post, I discussed the street value vs appraised value of real esate properties. If you put in substantial amounts of money and/or work into a property, it may not be necessary to wait for a year to see an increase in the value of your property in the eyes of hard money lenders.

If you purchase a commercial office building for $1,000,000 and immediately paint the interior, carpet the floors and rent out the erstwhile vacant building, within a few months, you may have a significant increase in the value of the property. The bulk of the increase in the value of the property will lie, not in the actual dollars spent on pain and carpets, etc., but in the income stream generated from the fact that you have successfully rented out the building. Get solidly written, long leases (3yrs +) in place and the value of that run-down empty building can be worth a whole lot more in just a few weeks' time.

You buy a property for $1,000,000 that is valued at $3,000,000. The next month, you ask for a loan of $2,000,000 based on the value of the property. No one is willing to make that loan. Why?

The value of property is a little like the MSRP and 'street cost' on retail products. The appraised value of your property, based on comps in the area, the business permits, use and potential income from it may be one thing. But the 'street price' is, obviously, what you paid for it.

If you are requesting a hard money loan, the lender will use the price you paid for the real estate as the 'value' number in the LTV equation. After you have owned the property for about one year, it will be considered 'seasoned' and a new appraisal may generate more capital for you. However, without any improvements in the property, you may still find yourself with a lower 'value' than you would hope for.

Land and construction loans seeem to be hard to get these days... so what else is new, right? Avatar Financial Group is receiving an increasing number of loan requests for construction projects. One suggestion we can offer for those 'already in the game' is to collateralize properties already constructed and operational to generate capital to build more projects.

For smaller construction projects, it may even be possible to collateralize private residences of the principals to generate capital for a construciton project. When the project reaches 85%+ completion, a loan based on the value of the project can be obtained and the initial loan(s) paid off. Use what you have to generate what you can and build on the equity in stages - think of it as a stepping stone method.

Here's an example of excellent bookkeeping practices that will pay off handsomely for a hard money client:

The client owns a building. He also owns a business. The business and the building each have their own corporate entity. The business corporation has occupied the building and paid rent every month to the building corporation for a quarter of a century. The business coporation deducts the expense of the rent in its books. The building corporation takes it as income.

With a clean record on the books of the actual transfer of the rental monies over the years, the building corporation will now be able to collateralize the building to generate a commercial bridge loan at an advantageous rate, since the building is rented out and income producing. It doesn't matter that the corporations are owned by the same person, since the books have been kept neatly all these many years.

Keep clear books - it pays off handsomely when you need it most.

Blanket loans are real estate loans that cover more than one piece of property. If you have two or more properties within a reasonably close location of each other, you may be able to collateralize them into one loan to generate the capital you need to accomplish your goals.

If the properties have a value of at least $1,000,000 each, this may be a reasonable solution to many hard money lending issues. However, for smaller value properties, you may find that the cost of due diligence on each property makes the upfront expenses for the loan to expensive.

Contact Avatar Financial Group by filling out a two minute loan application at: /borrower-qualification.php. We will let you know if your properties are a good fit for a blanket loan.

Pardon the pun - it's Valentine's Day. Speed is one the things people love most about hard money loans. When banks take months to review, approve and fund a loan, hard money lenders such as Avatar Financial Group can fund loans in less than two weeks!

The key to getting a hard money loan in two weeks or less is to have your financial and property-related documents ready to send to the lender when requested. Have the following at hand for a fast loan closing:

• Purchase agreement
• Financial Statements for all guarantors - 6 mths or newer
• Two years' taxes for all guarantors
• Credit Authorization and 4506 Request for Tax Form
• P&Ls for the business / property; if the property is rented - Rent Rolls
• Document indicating the use of funds
• Statement of where the balance of cash is coming from (hard money loans provide 65% of the purchase price. Where will the balance come from?)
• Corporate Structure Statement
• Corporate Resolutions
• Insurance information
• Title Report
• Survey
• Pay-off amounts for all lien holders

The initial approval process for a commercial loan is dependent on the photos of the property, the P&Ls, and the 'Executive Summary." The executive summary provides the 'story' behind your request. This important document must convince the lender that the loan is a good idea for you and for the lender.

Be clear and concise. Cover just the facts and edit the document carefully to make is as legible as possible. Here is what to include:

• Purchase price and date of purchase of the property
• Current appraised value or estimated value of the property
• Reason why are you seeking hard money or commercial bridge loan, rather than working with a conventional mortgage bank
• The timeframe in which you need the cash
• The amount you are requesting and the LTV (amount you request divided by the purchase price - or "value" if you have owned the property for more than a year)*

*NOTE: If you have owned a property for less than a year and have not put siginificant amounts of cash and improvements into the property, you will not be able to get a loan based on the "appraised value". You will get a 65% LTV loan based on the price you paid for the property. There are very few exceptions to this rule of thumb. One exception might be: you bought an empty commercial building and it is now completely rented and bringing in significant income. All you added to it was paint, office cubicles and a sign on the street. The income may make the difference between considering the purchase price vs the appraised value when determining the LTV for your loan.

A commercial bridge loan is a one-to-three year term loan for the purchase or refinancing of a commercial property. "Commercial property" is defined as any property acquired and/or used for commercial or investment purposes.

The reasons for obtaining a loan vary. The borrower or the property may not meet conventional banking criteria. Conventional banks may not be able to move fast enough to provide the loan in a timeframe required by the borrower.

If you require a commercial bridge loan, gather documentation to support the loan request in advance of submitting the request. Below is a list of documents that will get you the initial approval or denial from most lenders:

• photos of the subject property - inside, outside, and neighborhood
• P&Ls for the property, business entity or non-profit organization that will be obtaining the loan. (show that the loan payments can be met)
• Brief executive summary, explaining the circumstances, the basic information about the property, how much cash is required, where the balance of cash or equity is going to come from, and exit strategy for the loan.

Recently two loan requests came across the desks at Avatar Financial Group that fell into the agricultural loan sector. One was for a winery; the other for a horse breeding and training facility. What constitutes an agri-loan? If the ratio of land to building is very large and the business of the property is to raise livestock or plants, be they for food, drink, flowers, for consumption by people or animals, etc. the property falls into the agri-loan area.

Avatar Financial Group and other hard money lenders are restricted from funding such businesses, but you are welcome to contact Gillian@avatarfinancial.com for a referral to good agri-loan specialists who can help you find the right loan for your property and business. And rememebr, if you are only going to collateralize a winery tasting building, rather than the entire winery, you may still be able to get hard money bridge loans for your needs.