How to Negotiate With a Hard Money Lender in Commercial Real Estate
It can happen. You see a commercial real estate property that’s just come on the market, put in an offer that’s just accepted & now the waiting process starts. Soon, however, you’re the unhappy new owner or the owner who wants to “cut his loses” and get out of a deal because of perceived loss.
In almost every commercial real estate property we do, offer construction loans at a high interest rate and/or with deferred maintenance instead of full loan amounts. In this article, we’re going to talk about how you can quickly turn a bad deal into a great deal by doing this very simple technique. It’s called “Borrow Hard Money” & it can turn a bad deal into a money-making deal confidently.
You’ll need to know a little about the process and what hard money lenders expect, so let’s quickly walk through them. First of all, hard money lenders lend primarily by the amount of the construction loan you have (usually 75% to 90% of your total project’s loan to value). If they can see power in the real estate property, they’re much more likely to loan you more money.
Criteria
The next and very important criterion in hard money lending is the after-tax profitability of the property. Most hard money lenders want to see the income and expense work of the properties you’re considering, and so they will usually only lend on a property if its leaseable. Of course, different lenders will look at all the components of the property more keenly than the ones you’re looking at.
Many hard money lenders also require a personal guarantee to lend, in this case, a personal guarantee is an informal promise to make loan payments. Because the lender is placing their own capital at risk, they want to know that the borrower is trustworthy.
Once they have determined that the property can be used effectively & profitably and that the borrower can repay the loan over its term, most hard money lenders are excited to loan you money on a commercial deal. Unfortunately, you still must demonstrate that the property is profitable to them after the loan goes through.
A strategy that many experienced pros in both residential and commercial real estate use is to focus on commercial deals that present less personal risk. What this means is that you’re focusing on a deal that can be closed based on a commercial lease with a stable & third-party commercial tenant.
To illustrate this point, let’s create two examples.
Say for example you own a shoreland lot that’s zoned to allow a commercial company to build a new luxury golf course. This lot costs about $4 million, and if you were to put the property on the market for lease as a hotel, you’d most probably be able to get a hotel loan for $5 million to cover everything.
However, if you create something more personal: let’s say you were to offer certain furniture and tools for lease in the golf course design, and then put in a residential development of about $1 million in your own personal backyard. Golf course, tennis courts and a gymnasium all for about $1 million.
This $1 million filled protectorate (a premium rentmittedly) might be charged to your tenants, but that you can bill back to you in its entirety as a way of creating value in construction for the banks & because you’re “etiesing” your asset (your land) to them.
In both cases, once the deal is closed & your original $4 million (our examples are made up, but you get the point) is used to repay the hard money loan (yes, we forgot to mention it was a hard money loan).
At the end of the construction loan is paid off & the hotel is ready to offer your tenants a fully furnished flat around $35,000 per month.
How it Works
Keep in mind that this deal would make any lender envious ( intentional or not) Wall Street. There’s no doubt your local banker who doesn’t know the difference between identship and Retail is smiling in his mailbox right now.
They may not be in the Big Box happy about your deal, but they will appreciate your creative thinking and find it refreshing and precisely what they’re looking for.
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