The best piece of advice I can give to commercial property owners and investors trying to convince a private lender (often called a “hard money” lender) to make a loan is to talk more about things the lender cares about and do not talk as much about things you care about. Private bridge lenders have…
The best piece of advice I can give to commercial property owners and investors trying to convince a private lender (often called a “hard money” lender) to make a loan is to talk more about things the lender cares about and do not talk as much about things you care about.
Private bridge lenders have two primary goals the first is preservation of capital and the second is making money; from a business standpoint those are the primary things they care about. Any borrower who hopes to secure a loan approval and close a deal would do well to remain focused on these areas.
It is of paramount importance that you persuade the lender that they will get their money back, on time and with interest and that the property has the intrinsic value to support the loan.
Private Lenders Care about Current Values
Bridge lenders are short-term lenders. Most firms rarely makes bridge loans for terms of more than eighteen months. Grandiose visions of what a building will be worth after you refurbish it or how much income it will produce after you boost occupancy rates are all-well-and-good but will not be considered when a bridge lender is calculating their maximum loan amount.
Talk about the current value of the building and the current income the building produces and you will be speaking the language of the private commercial mortgage lender. Most private lenders have fairly strict loan-to-value (LTV) ratio standards that they are will not violate. Virtually all of them are based on current market value or quick sale value. Loan officers will listen to your plans for value creation and wish you well but they will only lend money against today's value and income.
Private Lenders Care about Protective Equity
Borrowers argument in vain when they argue with private commercial mortgage lenders for higher LTV ratios. Preservation of capital is a primary objective of every bridge lender out there. The people who invested millions of dollars in private commercial mortgage pools and private equity funds that make commercial mortgage bridge loans are very interested in making money but they are even more interested in not losing the money they already have.
Every LTV percentage point is a point of risk to the lender. The managers of commercial mortgage funds thought very carefully about how much risk they were willing to take and they set their maximum LTV ratios based on that assessment. The private investors, pension funds and trusts that placed money with a private lender did so based on the specific investment policy (including LTV rations) that was presented to them.
Do not bother requesting a higher LTV you will not get it. Instead put your efforts into archiving the required LTV. Consider bringing in a cash partner, think about contributing more hard equity (cash) out-of pocket, look into syndicating the deal, or, if you're buying an existing asset, renegotiate the purchase price with the existing owner.
Private Lenders Care about the Exit Strategy
One of the best ways to get into a loan is to work out how you are going to get out of the loan before you even apply. In-other-words, your exit strategy is more important to a private lender than any other aspect of your business plan. Make sure you have a good one and emphasize it through the loan process.
Short-term lenders want to know for sure exactly how and exactly when they will be paid back, in-full, with interest. You will be asked about your exit and your exit will be scrutinized. You will be tempted to talk about getting into a deal. Resist that temptation and talk to your lender about how you will be paying them off and getting them out.
If your exit is the sale of the asset have detailed comparable sales data on hand, have a comprehensive marketing plan already done before you ask for a dime. If you are planning to use a real estate agent, select them ahead of time, use one that specializes in commercial properties and have them draw up a broker price opinion for you.
If your exit plan is to get funded through a conventional lender meet with the loan officer and get as much commitment from them as they are willing to give; a forward commitment is ideal though not easy to get. Print out the banks lending criteria and prove to your private lender that you can and will meet them. Set up a call or meeting between your bank lender and your private lender so everyone can be sure everyone is on the same page.
Your vision will be about getting in and adding value. Your bridge lenders vision will be all about getting paid and getting out. Talk about what is important to them.
Private Lenders Care about Commitment
If a private lender makes a short term commercial bridge loan to fund your project they will be making a huge financial commitment; they will want to see a huge commitment to the deal on your part.
Always talk about what you are willing to do to make a deal work. Never talk about what you refuse to do. When a potential borrower applications for a commercial mortgage and the first thing they mention is something they are not willing to do, it is the kiss of death to their loan application.
Negative statements are taken as a lack of commitment and will be extremely off-putting to lenders.
Declarations like: “I'm putting in X dollars in cash and not a dollar more” or “I will not sign a personal guarantee” to say to a lender “I'm not really committed to this deal.” If your not 100% behind a deal the lender will walk away.
The kind of borrower private lenders are looking for the kind who is so convinced that their deal will make them money that they are willing to go all in. If you nickel and dime a hedge fund or private equity shop about things like appraisal fees and legal expenses it will be taken as a sign that your deal is not all-that strong.
A good rule of thumb is until you have a preliminary approval in-hand and you know the bridge lender wants to make a deal do not say anything except that you are willing to do what ever it takes to get it closed. There will be time later to talk about who pays for the survey or the phase one environmental report (it will be the borrower) or to discuss the level of personal versus business recourse to build into the loan.
Never open with your demands. Lenders do not care about what you will not do they want to know what you will do.
Private lenders want to make deals; that's how we make our profits. That-being-said, do not forget that not losing money is at-least as important to bridge lenders as making money is.
When in talks with a private commercial mortgage lender, stick to things that are important to them. This will show that you are professional and have a realistic outlook.
Stress the current value of a property, do not ask lenders to relax LTV standards instead find ways to reach them, have a real exit strategy and be ready to defend it and demonstrate as much commitment to your deal as you are asking for the lender.
In-short, if you want them to write that big check, talk much more about what concerns them and much less about what concerns you.