Avatar's Blog
» Understanding Real Estate as Collateral
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.
