Avatar's Blog
» 65% - 20% - 15%: How a Hard Money Purchase is Stru
Many borrower want to know if Avatar will fund 100% of the purchase price of a commercial property. They often note that the property is appraised for a higher amount than the purchase price and claim that they will have therefore have instant equity in the property. In truth, the actual resale value of a commercial (or residential for that matter) property is the sum that it will change hands for today between willing parties. MAI appraisals take into account a (sometimes) very long sales lead time - often one or more years to find a buyer willing to pay 'retail' for the property.
Therefore, Avatar will lend up to 65% of the current selling price of commercial, industrial or residential real estate in the US. The balance of funds required to close can come from the buyer or a combination of the buyer and another source, such as a seller carry-back loan. The buyer must put up a minimum of 20% at closing. The balance of 15% can be a subordinated loan.
The reason the buyer is required to put up 20% has to do with commitment to the project. Hard money lenders find that when buyers have no equity at all in a project, the propensity to 'drop off the keys' if they run into a bump in the road increases dramatically. Basically, the borrower notes that others have money in the deal, but they don't - and if things don't go as planned, it is very easy to throw in the towel. Borrowers who have cash to lose if they pull out of a deal and let the loan default, are far more committed to working through rough times to make the project a success. Avatar seeks to work with borrowers who are committed to their projects; our goal is to make loans that make sense for the borrower and for the lender.
